Refinancings in the European debt market were aplenty in 2019, but 2020 could be a good year for high yield, making ETFs that focus on less-than-investment grade credit a prime option on the watch list for next year.
Per a Bloomberg report, “Bankers expect leveraged buyouts and lower rated credits to drive a bigger share of bond sales next year as investors dial up their appetite for risk in a bid to secure market beating returns. In contrast, a mood of investor caution has characterized much of 2019 amid concerns around rising default rates and a turn in the business cycle.”
“Given the ‘lower-for-longer’ mind set and what looks to be a healthy market backdrop, we expect the demand for higher yields to increase,” said Mansour Nehlawi, who works for the high yield and leveraged loans syndicate desk at Citigroup Inc. in London. “This opens up room to weaker credits and more junior parts of the capital structure.”
“We’ll likely see more LBO activity going into 2020 due to the growing amount of dry powder that private equity firms are sitting on and have available to use, due in part to activity and deal making being delayed this year,” said Ian Hart, U.K. Chairman of M&A Ian Hart at UBS AG.
High Yield ETF Options
Investors seeking high yield can look to ETFs like The High Yield ETF (NYSEArca: HYLD). HYLD seeks high current income with a secondary goal of capital appreciation by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper.
For investors seeking high-yielding income and emerging markets exposure, they can look to the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
Another option is the VanEck Vectors Fallen Angel High Yield Bond ETF (BATS: ANGL). ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.
ANGL essentially focuses on debt that has fallen out of investment-grade favor and is now repurposed for high yield returns with the downgraded-to-junk status.
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