- Strengthened speculative-grade debt may continue to support junk bond-related ETFs
- If fixed-income market follows historical trends, junk bonds may continue to rally over the next few weeks
- Financials are the best performing sector when junk bond ETFs rise, according to Kensho data
The renewed risk-on environment has helped speculative-grade debt strengthen could continue to support junk bond-related exchange traded funds, along with other market segments that benefit from the improved outlook.
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 by assets, have been among the most popular ETF plays in the recent market rebound, gaining 5% in recent weeks. [Junk Bond ETFs are Hot Again]
According to Kensho data, if the fixed-income market follows historical trends, junk bonds may continue to rally over the next few weeks. Kensho found that after JNK rose 5% or more in two weeks, the fund has pushed 3.3% on average over the following two weeks, reports Deirdre Bosa for CNBC. HYG has also shown a positive correlation, with gains of almost 2.5% on average after the run.
Alternatively, Kensho also discovered that financials are the best performing sector when junk bond ETFs rise, followed by consumer discretionary, industrials and materials.
Over the past two weeks, the Financial Select Sector SPDR (NYSEArca: XLF) rose 3.5%, Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) gained 4.2%, Industrial Select Sector SPDR (NYSEArca: XLI) added 3.4% and Materials Select Sector SPDR (NYSEArca: XLB) increased 5.2%.
Materials have been among the best performing areas of the market as the strengthening economic outlook and rising metals prices helped prop up the sector. [Miner ETFs Surge on Improving Metals Prices, Economic Outlook]
Moreover, as risk appetite helps speculative-grade debt strengthen, emerging markets should also benefit from the heightened risk tolerance. For instance, the iShares MSCI BRIC ETF (NYSEArca: BKF), which tracks Brazil, Russia, India and China markets, traded positive in all 10 instances, rising 14% on average, after junk bonds bounced 5% in two weeks. The broader iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and country-focused iShares MSCI South Korea Capped ETF (NYSEArca: EWY) and iShares MSCI Mexico Capped ETF (NYSEArca: EWW) have also been decent plays for a risk-on rally, according to Kensho data.
SPDR Barclays High Yield Bond ETF
Max Chen contributed to this article.