David Mazza, head of research for ETFs at State Street Global Advisors, attributes JNK’s underperformance to transaction costs. When an ETF rebalances its portfolios to better track the underlying index, the fund must buy or sell debt securities. While iBoxx absorbs some of the transaction costs, Barclays indices does not, which may help explain JNK’s poorer performance to its benchmark.
Nevertheless, many investors are willing to look beyond these shortcomings as the junk bond ETFs provide a way to capture short-term, tactical plays on the high-yield debt market. Since ETFs trade like stocks on a stock exchange, anyone can access the funds through a normal brokerage account. [The Fed Can’t Faze Junk Bond ETFs]
“People are enamored by market timing and liquidity,” Krishna Memani, chief investment officer and head of fixed income at OppenheimerFunds, told the Financial Times. “Expecting ETFs to give you exact market returns is too much, but you get liquid exposure to the market.”
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article