The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds, are down an average of about 11% this year as controversy for the junk bond space has been easy to come by.
However, junk bonds could improve next year, according to some analysts. Still, a rising number of defaults by energy sector issuers are troubling some junk bond market participants. “A 4.5% 2016 high yield default rate equates to $66 billion of defaults and would be the fourth highest default total since 2000. This would be close to the $78 billion amassed in 2001 but well below the record $119 billion posted in 2009,” said Fitch Ratings in a note posted by Amey Stone of Barron’s.
The popular high-yield ETFs include significant exposure to lower quality speculative-grade debt that are at greater risk to default. For instance, JNK has a 13.8% tilt toward CCC or lower-rated debt and HYG has 8.8% in CCC-rated securities. [Bond ETF Outflows Picking Up]
“We carry a state of tempered optimism toward high yield heading into 2016. With a near certainty the Fed commences liftoff in mid-December there is an underlying nervousness about the uncertain consequences for currencies, treasury yields, equities, and capital markets,” said JPMorgan in a note posted by Amey Stone of Barron’s.
With its emphasis on higher quality issues, the The PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB), which tracks the RAFI Bonds US High Yield 1-10 Index, is another junk bond ETF for investors to consider.