Speculative-grade debt and junk bond-related exchange traded funds have made a quick turnabout as crude oil prices oscillate from a bear to bull market in less than a month.
In seven months last year, U.S. energy junk bonds lost $56.7 billion in market value, with average yields shooting up to as high as 21%, as crude oil prices plunged, reports Lisa Abramowicz for Bloomberg.
SEE MORE: Falling Oil Prices Renew High-Yield, Junk Bond ETF Concerns
The junk bond market, though, recovered as oil prices bounced from their February lows, with energy junk debt gaining almost 40% or about $53 billion of market value from March through July.
More recently, as crude oil prices rebounded from a bear market at the start of the month, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) gained 2.5% and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) increased 2.6%, largely shaking off any perceived credit risks in the energy sector as oil prices plunged.
The junk bond ETFs include significant exposure to the highly energy group. For instance, HYG has a 13.0% tilt toward the energy sector.
However, Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, warned that the credit quality of these energy bonds have deteriorated due to the depressed oil prices since 2014, pointing out that about 40% of bonds in the U.S. energy high-yield index have the lowest ratings, or twice as high a proportion as in June 2014. Consequently, investors may be exposed to greater risks than they care to admit as more search for yields in a low-rate environment.
SEE MORE: Junk Bond ETFs Shake-Off Year of Uncertainty
Alternatively, 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.
For more information on the speculative-grade debt market, visit our junk bonds category.
SPDR Barclays High Yield Bond ETF