High-Yield and Harvard Endowment Loves This ETF

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) is not only the largest high-yield bond exchange traded fund trading in the U.S., it is one of the biggest bond ETFs of any variety. That says HYG has a solid following among institutional investors.

HYG investors include the Harvard University endowment. Recent data indicate HYG is the largest publicly traded holding for Harvard Management Co., the prestigious university’s famed endowment.

“Harvard Management Co. disclosed in a filing that it held 9.6 million shares of iShares iBoxx High Yield Corporate Bond ETF valued at $841 million in the first quarter. The ETF gained 1.9 percent for the three months,” reports Michael McDonald for Bloomberg.

HYG celebrated its tenth anniversary last month. In its decade-long existence, HYG has showed a solid history of outperformance, returning a 5.6% average annualized return over the period. In contrast, the benchmark Bloomberg Barclays US Aggregate Bond Index showed an average annualized return of 4.3% over the past 10 years. Over the past year, HYG also increased 13.3%, compared to the Agg’s 0.4% gain. That data pertained to HYG’s tenth anniversary date, which was early April.

HYG’s underlying index, the Markit iBoxx USD Liquid High Yield Index, also requires holdings to have at least $400 million in par value, and the debt issuer must have at least $1 billion in total debt outstanding.

Harvard’s “endowment, according to its 13F filing, bought options on two exchange-traded funds — 4 million shares of iShares MSCI EAFE, which tracks stocks in developed countries excluding the U.S. and Canada, with a face value of $249.2 million, and 6.3 million shares of iShares MSCI Emerging Markets, with a face value of $248 million. The endowment also sold $91 million of the iShares MSCI Emerging Markets ETF in the first quarter,” according to Bloomberg.

Due to junk bond’s more “equity-like” nature compared to Treasuries or investment-grade debt, high-yield bonds could strengthen on the higher growth environment in the U.S., especially with rebounding oil prices that would further diminish credit risk for energy-related speculative-grade debt, the largest sector that makes up about 15% of high-yield market.

While interest rates are rising, rates are still hovering near historical lows, which will help make it easier for companies to repay debt or reduce default risks. More quick-witted corporate treasurers have already locked into low, long-term loans, further mitigating default risks.

For more information on the fixed-income market, visit our bond ETFs category.

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