• Two largest high-yield corporate bond ETFs by assets – HYG and JNK – have recently spent some time wearing the label “controversial”
  • Controversial or not, high-yield corporate bond ETFs are gathering assets
  • It could be time to revisit these high-yield corporate bond ETFs with oil prices rebounding

Against the backdrop of falling oil prices and thoughts of higher interest rates, 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 recently spent some time wearing the label “controversial.”

Controversial or not, high-yield corporate bond ETFs are gathering assets at a fevered clip as equities rally and investors revisit riskier assets.

With plenty of bad news baked into these and other junk bond ETFs, it could be time to revisit the asset class, particularly with oil prices rebounding. Among the weakest areas in the debt market, oil and gas sector makes up 34 of the lowest-rated credit issuers with negative outlooks in December. Additionally, financial companies were a close second, with 33 of the weakest links, according to the S&P. [Rising Default Risks in Junk Bond ETFs]

“BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund absorbed a record $1.5 billion over the last six days, according to data compiled by Bloomberg, a sign that sentiment among credit investors is improving as crude rebounds from a 12-year low,” according to Bloomberg.

Investors attracted to the cheap valuations and wider yield premiums that more speculative-grade debt offers over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped toward all-time lows.

The BofA Merrill Lynch US High Yield Index shows a 8.17% yield, whereas 10-year Treasury notes have a 1.711% yield. Looking at the ETF options, JNK has a 4.29 year duration and a 8.06% 30-day SEC yield. HYG has a 4.0 year duration and a 9.01% 30-day SEC yield.

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