We believe the fear and concern recently expressed for high yield ETFs is misplaced. During times of fundamental or economic concerns or “risk off” trades, it is natural for prices to move down, and in some cases swiftly. That has always been the case for markets, but then again, we can also see swift moves up/recovery as market sentiment improves—markets tend to be manic. High yield ETFs have grown in popularity over the past several years, and while that has had an improvement in accessibility for retail investors, this ETF market is still small relative to the broader high yield market and we don’t buy the argument that this small piece of the high yield pie can lead to the market’s demise. Mutual funds have existed for decades and money flows in and out of those daily, and similar concerns have not been expressed for this market. We believe that if anything, high yield ETFs provide an advantage over mutual funds because ETFs trade/price intra-day, so we would argue provide a more accurate and true pricing mechanism for going in and out of the high yield market than mutual funds that only trade at the end of the day.
We believe that high yield ETFs provide investors great accessibility to what we see as a very attractive asset class. And while the recent regulations may add an element of volatility to the market, we would view this volatility as an opportunity for active managers who can capitalize on discounts. However, we do not expect this volatility to lead to a collapse in the high yield market and believe that investors who abandon this market due to some of these concerns are missing out on the tangible yield it has to offer and the historically better risk adjusted returns versus equities that the high yield bond market has provided.7
1 From the publication “Outstanding U.S. Bond Market Debt” release by SIFMA, as of 3/31/15.
2 Acciavatti, Peter Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, July 31, 2015, p. 42.
3 Source SIFMA as of 3/31/2015 for total corporate debt. Loan market size from Blau, Jonathan, James Esposito, and Amit Jain, “Leveraged Finance Strategy Weekly,” Credit Suisse Fixed Income Research, July 31, 2015. Loan market size of $1.986 trillion, for corporate bond and loan market of a combined estimate of $9.95 trillion.
3 Acciavatti, Peter Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “2014 High-Yield Annual Review,” J.P. Morgan North American High Yield Research, July 31, 2015, p. 300.
4 Fuller, Matt, “Cash flow for US HY funds turns deeply negative,” July 30, 2015, and “Retail cash outflows from HY funds deepen with huge ETF influence,” April 30, 2015, S&P Capital IQ, LCD News.
5 Fuller, Matt, “Cash flow for US HY funds turns deeply negative,” July 30, 2015, S&P Capital IQ, LCD News.
6 Fuller, Matt, “Cash outflows from HY mutual funds offset by ETF inflow last week,” December 31, 2014, S&P Capital IQ, LCD News.
7 Risk adjusted returns in terms of annualized return divided by annualized standard deviation over various periods, see our piece “High Yield versus Equities” for actual data.
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD).