High-Yield, Junk Bond ETFs Are Gaining Traction

HYG, which tries to reflect the performance of the Markit iBoxx USD Liquid High Yield Index, also includes a 14.1% tilt toward the energy sector.

Moreover, investors poured $413.8 million into the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, over the past week, which suggests that some are turning to the senior secured floating rate bank loan market to hedge against rate risks.

Senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates. Since rates are typically reset once per quarter, senior loans typically have low durations – a measure of a bond fund’s sensitivity to changes in interest rates. The floating-rate component also offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.

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