Junk Bond ETFs: Support from Managers Playing Catch Up?

Junk bond exchange traded funds may still have legs as underperforming active managers help support prices.

Speculative-grade, junk bonds have rallied off the February lows as some saw default risks, notably those associated with the energy sector, dissipate in light of rising crude oil prices. Year-to-date,  the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) gained 4.5% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) rose 4.4%.

However, Goldman Sachs pointed out that 90% of actively managed high-yield debt funds have failed to meet or surpass their benchmarks this year, reports Tracy Alloway for Bloomberg.

Related: High Quality Junk Bond ETFs Limit Default Risk

Active bond managers exited the market after speculative-grade debt tanked at the end of last year, but the asset category staged an impressive rally in March and April, causing many to miss out on the rebound.

“Key to the underperformance was the defensive positioning of high-yield funds heading into the year, maintaining high cash balances and low conviction as oil, recession, and redemption fears pulsated through the credit markets. However, the defensive strategy left funds underinvested when the high-yield and oil market sharply turned a corner in tandem in mid-February,” Goldman’s Bridget Bartlett wrote in a research note.


Moreover, Bartlett argued that the dearth of new bond issues from riskier companies has exacerbated the difficult trading environment, hindering bond investors’ ability to keep pace with the sudden reversal in debt markets.