Bond investors have witnessed heavy selling in U.S. speculative-grade debt as concerns mount, but international high-yield bond exchange traded funds may be exposed to less risks than the domestic fixed-income markets.
European Central Bank asset purchases, assurances from the Federal Reserve that the rate hike will be gradual, attractive yields and relatively contained risks associated within the U.S. energy sector have led some observers to grow more optimistic, report Laurence Fletcher and Christopher Whittall for the Wall Street Journal. [Is the Selling in Junk Bond ETFs Overdone?]
For instance, European high-yield is better situated than junk bonds in the U.S.
“We’ve got a reasonably long life left in the asset-purchase scheme over here [in Europe],” Rabbani Wahhab, a fund manager at London & Capital, told the Wall Street Journal. “If you look at the composition of high-yield borrowers in the euro area, it’s nowhere near as leveraged [as the U.S.]. It looks like a better place to be.”
International high-yield, junk bond ETFs have slightly higher quality speculative-grade portfolios than U.S. junk bond funds. For instance, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY), SPDR Barclays International High Yield Bond ETF (NYSE: IJNK) and iShares Global ex USD High Yield Corporate Bond ETF (NYSEArca: HYXU) allocate about 60% to BB-rated junk bonds and about 5% to CCC-rated debt. In contrast, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) includes a slightly lower 50% tilt toward BB-rated debt and higher 8.7% to CCC-rated debt, and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) holds 41.6% BB and 14.6% CCC or lower.