Embracing High-Yield ETFs For The Long-Term | ETF Trends

Many advisors and investors view high-yield corporate bonds and the related exchange traded funds (ETFs) as tactical plays to be used over short- to medium-term time frames, but these funds are strategic in nature and can be viewed as important ingredients in broader portfolio construction.

Fortunately, fees on junk bond ETFs are declining. Take the case of the SPDR ICE BofAML Broad High Yield Bond ETF (NYSEARCA: CJNK), formerly known as the SPDR BofA Merrill Lynch Crossover Corporate Bond ETF.

Last month, CJNK became the SPDR ICE BofAML Broad High Yield Bond ETF and started tracking the widely followed ICE BofAML US High Yield Index. The ETF’s ticker will remain the same, but its expense ratio will fall to 0.15% per year, or $15 on a $10,000 investment, making it the least expensive junk bond ETF on the market.

“Based on demographic shifts and a persistent low yield environment, income generation is an outcome targeted by many investors when constructing portfolios today,” said State Street in a recent note. “High yield is an asset class that should be at the center of any income-generating portfolio, just by virtue of it carrying a yield 63% higher than that of the combined yield of global aggregate bonds and global equities, on average, over the past 20 years.”

A Famous Family Member

CJNK is the lower cost alternative to the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the second-largest junk bond ETF. JNK, which is highly popular with institutional investors, will retain its annual fee of 0.40%.

JNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index, which is designed to measure the performance of publicly issued U.S. dollar denominated high yield corporate bonds with above-average liquidity.

“Relative to traditional bond categories, high yield corporate bonds offer higher risk adjusted returns, carrying a Sharpe ratio of 0.66 over the last 15 years compared to 0.38 for global aggregate bonds and 0.52 for US Treasuries,” according to State Street. “There is also the aspect that high yield, historically, has earned similar returns to US stocks (7.2% versus 8.9%) but with less volatility (8.99% versus 13.5%)—or rather, a minor 13% less return but with 34% less volatility.”

With option-adjusted duration of 3.55 years, CJNK holds nearly 940 bonds. The fund has a 30-day SEC yield of 5.93%.

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

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.