Running On Fumes: Energy Sector Defaults and Junk Bond ETFs | ETF Trends

With oil prices slipping, the highly leveraged shale oil industry could experience greater defaults, potentially weighing on speculative-grade bond markets and junk-related exchange traded funds.

Year-to-date, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) dipped 0.5%, SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) fell 0.6%, PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB) remained relatively unchanged and AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) decreased 2.2%.

The junk bond ETFs are exposed to the potential problems in the energy sector. For instance, energy companies make up 12.8% of HYG’s portfolio holdings, 14.2% of PHB and 8% of HYLD.

Industry experts warn that more oil-and-gas companies are poised to follow the recent Samson Resources Corp. bankruptcy filing as oil prices remain low after the steep drop off that began last year, the Wall Street Journal reports.

Samson was among six energy companies to default in the past six weeks, according to Fitch Ratings.

West Texas Intermediate crude oil futures were hovering around $44.8 per barrel Friday, compared to about $93 per barrel the same time last year.

According to Fitch Ratings, the default rate among U.S. energy companies has accelerated to 4.8%, its highest level since 1999, up from 3.3% in August. Additionally, exploration and production companies are defaulting at an even higher rate of 8.5%, with default volume at its highest level in five years.

In contrast, the broader U.S. corporate default is still a relatively low 2.9%.