The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) along with other high-yield corporate bond exchange traded funds have been hampered on multiple fronts this year.
Junk bond ETFs have already been identified as vulnerable to declining oil prices as many high-yield managers believe the energy sector can survive with oil prices north of $75 but there may be increased defaults if oil remains below $60 per barrel.
Energy sector makes up about 13% of the Bank of America Merrill Lynch High Yield Master II Index. The junk bond ETFs also include significant exposure to the energy sector – for example, HYG has a more than 12% weight to energy bonds.
While some market observers see value in high-yield bond ETFs, risks remain as junk bonds could see a sell-off during a rising rate environment after years of low interest rates pushed more investors into speculative-grade debt in search of yield. [3 Reasons to Consider Short Duration High Yield]
The good news for these ETFs and others like them is that there is a legitimate for case for value hunting among high-yield bonds.
“Historically, when the overall risk of the market, as measured by these five variables, has been at its present level, the index’s OAS [option-adjusted spread] has averaged 571 bps. The actual Aug. 31 spread was 570 bps, a shortfall of one basis point… By Sept. 18, the actual OAS had widened to 580 bps, turning the fair value gap slightly positive (10 bps),” said Lehmann Livian Fridson Advisors Chief Investment Officer Marty Fridson in a note posted by Amey Stone of Barron’s.