Bearish Traders Target Junk Bond ETFs

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds by assets, are drawing bearish bets.

“Demand to short the three largest exchange-traded funds tracking the asset class surged to more than $7 billion this week, according to data from Ihs Markit Ltd. published Wednesday. That’s the highest on record,” reports Bloomberg.

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. Due to their similar focus on liquidity, the two high-yield bond ETFs have similar portfolios.

HYG more closely tracks its underlying index as the fund accurately reflects the prices avail­able to the fund – mew bonds are added to the index at the ask but are subsequently priced at the bid, which helps reduce the gap with its index, but this also reduces the index’s return.

Year-to-date, HYG and JNK are two of the 10 worst ETFs in terms of outflows.