High-yield corporate bonds are one of the biggest stories in 2012 for the ETF business.
First, investors scratching for yield have been piling into ETFs that invest in non-investment-grade or “junk” bonds.
Also, a big trade in a junk bond ETF this month has some wondering if big investors will use ETFs more to avoid trading in the secondary market. There are also questions about how this activity could impact long-term investors in these ETFs. [Will More Big Investors Use ETFs to Disguise Trades?]
“Corporate bonds are denoted as ‘high yield’ for the sole reason that firms issuing them are highly leveraged. Companies with this kind of leverage profile can get there either intentionally, as the result of a leveraged buyout, leveraged acquisition or recapitalization, or unintentionally because of a deterioration of the underlying business of an erstwhile investment-grade firm,” John Gabriel wrote in a Morningstar analyst report.