Quality Matters in Junk Bond ETFs

The speculative-grade debt market has been pressured from rising credit risks, mostly out of the energy and materials sectors as traders anticipate greater defaults in light of the depressed commodities market.

According to Standard & Poor’s, the U.S. distress ratio, an indicator of default risk, was at 20.1% in November, or near its highest leve since the last recession, reports Stephanie Yang for CNBC.

Oppenheimer’s head of technical analysis Ari Wald singled out low oil prices as a main negative factor dragging on default risks. According to the S&P, oil and gas made up the highest number of issues in the distress ratio and 37% of total distressed debt. [Running On Fumes: Energy Sector Defaults and Junk Bond ETFs]

“Drops in oil prices affected profitability for oil and gas companies, where spreads have widened considerably, and had a spillover effect to the broader speculative-grade spectrum,” S&P managing director Diane Vazza said.

PHB includes a 12.8% tilt toward energy and HYG also holds about 12.2% in energy.

For more information on the speculative-grade debt market, visit our junk bonds category.

Max Chen contributed to this article.