Falling Oil Prices Renew High-Yield, Junk Bond ETF Concerns

Energy company debt defaults have driven S&P’s trailing US junk bond default rate to a six-year high of 4.5% in July. Standard & Poor’s rating agency also projects the rate will rise to 5.3% by March 2017. Energy and natural resource companies made up over half of the 105 companies that defaulted globally this year.

The junk bond ETFs also include some significant exposure to the energy sector. For instance, HYG includes a 12.8% tilt toward energy producers.

However, yield-starved investors who are still interested in the junk bond space but are wary of further credit risks among energy producers may consider a recently launched ex-energy, high-yield bond ETF, the iShares iBoxx $ High Yield ex Oil & Gas Corporate Bond ETF (NasdaqGM: HYXE). HYXE basically tracks the same group of debt securities as HYG except it does not hold exposure to energy companies.

Related: July ETF Flows Show Investors Turned Risk-On

The ex-energy exposure may have also helped HYXE outperform HYG. Over the past month, HYXE gained 1.3% while HYG rose 0.6%. Over the past week, HYXE only dipped 0.4%, compared to the 1.0% pullback in HYG.

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