Count at least one well-known Ivy League endowment fund as an investor in major high-yield corporate bond exchange traded funds.
Harvard Management Co., Harvard’s endowment manager, trimmed stakes in the iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield bond ETFs, during the second quarter.
The endowment manager sold about $90 million of shares in the two ETFs during the second quarter, reports Lisa Abramowicz for Bloomberg.
Although Harvard Management reduced its investments in HYG and JNK, the fact that endowment plans hold those ETFs at all underscores increased usage of fixed income ETFs among institutional investors. A study out earlier this year, Bond Market Challenges Continue to Drive Demand for Fixed-Income ETFs, conducted by BlackRock’s (NYSE: BLK) iShares unit, the world’s largest ETF sponsor, and Greenwich Associates, notes that bond ETFs are taking on increasingly important roles in institutional portfolios.
Increased use of bond ETFs by institutional investors jibes with the findings in the 2014 survey conducted by BlackRock and Greenwich Associates. At the time of publication, the 2014 survey predicted “U.S. Treasury funds are expected to see decreased usage over the next year with 30% of respondents to the Greenwich study saying they expect to reduce exposure to U.S. government bonds. Low duration or rate hedged funds are expected to see the biggest uptick in usage with 34% of respondents saying they will add exposure to those funds.” [Institutions Boost use of Fixed Income ETFs]
Institutional investors are increasingly turning to fixed income ETFs to express fundamental views while coping with low interest rates and the potential for increased bond market volatility. Overall, 59% of fixed-income ETF users reported that they have increased ETF usage since 2011,” according to the study.
Junk bond ETFs have recently been under pressure due to sliding oil prices and lingering concerns that the Federal Reserve is closing to raising interest rates. Moody’s Covenant Quality Index, which measures the strength of legal protection in junk bonds, dipped in June to its weakest level since the index was created in 2011. With the Federal Reserve set to hike interest rates, junk bonds could also come under pressure. [Junk Bond ETF Risks]
Some investors may no longer be willing to tap into the attractive yield opportunities in the high-yield bond market against a backdrop of growing risks, especially with concerns over energy and commodities ahead of a Federal Reserve interest rate hike.
iShares iBoxx $ High Yield Corporate Bond ETF
Tom Lydon’s clients own shares of HYG and JNK.