If you follow bond markets—and maybe even if you don’t—you’ve probably been hearing a lot about high-yield. Some say this so-called “junk” spells doom. Others say there’s still value there, but you must be selective. We would agree that selectivity is crucial in this space—after all, these are the bonds of companies with widely diverging performance. For exchange traded fund investors, that means knowing what you own: Not all high-yield ETFs are the same. I’d like to take a look at one high yield investment in particular to set the stage for you.
HIGH YIELD AND INVESTING FOR THE LONG RUN
Let’s start by taking a look at performance. How do funds like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) stack up against other high yield investments out there for long term investors? Year-to-date (through 10/31/15) HYG has returned -0.61 percent vs. -0.46 percent for the Markit iBoxx USD Liquid High Yield Index that it seeks to track.
STANDARDIZED PERFORMANCE AS OF 9/30/2015
| 1 Year | ||
|---|---|---|
| Fund NAV Total Return | -4.43% | |
| Fund Market Price Total Return | -4.53% | |
| Index Total Return | -3.98% | |
| 5 Year | ||
| Fund NAV Total Return | 5.16% | |
| Fund Market Price Total Return | 5.02% | |
| Index Total Return | 5.37% | |
| Since Inception (4/4/2007) |
||
| Fund NAV Total Return | 4.98% | |
| Fund Market Price Total Return | 4.97% | |
| Index Total Return | 5.38% | |
| Expense Ratio (as of 7/1/2015) |
0.50% |
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.iShares.comor www.blackrock.com, or by clicking here. Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
As HYG is an index fund, its objective is to track its index (less management fees). HYG’s management fee of 50 basis points works out to 42 basis points for 10 months. As the fund is trailing by 15, we see that it is doing slightly better than its index after accounting for fees.
Looking at this over the past 5 years we see that HYG has returned 5.28 percent annually versus 5.53 percent for the iBoxx index. HYG trails by 25 basis points, and so again is just ahead of its index after accounting for fees.
So HYG has tracked its iBoxx index fairly consistently through time. But what does the iBoxx index represent, and how does it track to other high yield investments? The iBoxx index constituents represent the larger high yield bonds in the market, specifically those with more than $400 million outstanding that come from issuers with more than $750 million outstanding. This differs from broad indices such as the Barclays U.S. Corporate High Yield Index or the BofA Merrill Lynch US High Yield Index, both of which include smaller bonds. iBoxx thus has a large issue bias, and does not capture the performance of smaller, often less liquid bonds. If we break down the Barclays index we can see how the performance of larger and smaller high yield bonds differs over time: