“As funds play catch-up to their benchmarks, bond managers are more incentivized to step down the quality spectrum to find alpha [outperformance],” Bartlett said. “We believe this will intensify the ‘search for yield’ that has already been set in motion by easy global monetary policy.”
Consequently, now that active junk bond fund managers are underperforming the market, more may be forced to take on riskier, higher-yielding debt.
Related: ETF Investors Grow Wary of Junk Bond Rally
“We think the underperformance of high-yield funds will likely accelerate the next phase of the search for yield trend with investors stepping down the high-yield quality spectrum, into B- and CCC-rated bonds to find alpha,” Bartlett added.
The ongoing search for yield among more junkier speculative-grade debt could help support the related ETFs. For instance, HYG holds 0.4% BBB-rated debt, 50.8% BB, 36.7% B, 11.5% CCC, 0.8% CC and 0.01% C. JNK includes BB 42.5%, B 41.4% and CCC or lower 16.0%.
For more information on the Junk Bond ETF market, visit our Junk Bonds category.
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