Data indicate bond investors recently reduced positions in high-yield corporate debt exchange traded funds, but some market observers see investors as mostly comfortable with junk bond ETFs.
For example, the iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG) was the most hated ETF play of the past week as investors pulled $2.8 billion from the fund, and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) experienced $1.3 billion in outflows as well, according to XTF data.
“Moreover, safer investment-grade bond funds have suffered more than sub-investment-grade or junk ones. Investors pulled a record $7.5 billion from investment grade funds and ETFs last week, according to Bank of America Merrill Lynch,” reports Paul Davies for the Wall Street Journal. “They also took $6.1 billion from junk-bond funds, but there were bigger outflows in February, the last time stocks tumbled.”
Mitigating Rate Risk
The current interest rate environment spotlights the interest rate risk associated with traditional junk bond funds, but some ETFs address that risk while keeping investors involved with relevant credit opportunities.
The ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG) is one way investors can stay involved with high-yield corporate debt while reducing interest rate risk. HYHG tracks the FTSE High Yield (Treasury Rate-Hedged) Index.
Related: Top 56 High Yield Bond ETFs
HYHG, which is over five years old, “targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures,” according to ProShares.
“The spread on junk bonds hasn’t yet increased enough to break out of the generally downward trend that has lasted almost three years,” according to the Journal. “The spread is up by more than 0.4 percentage points since its low point at the start of October on the ICE BofAML U.S. High Yield Index, but remains below where it traded most of the period before May this year. Of course, the total interest cost for junk bonds is greater than it has been since late 2016 because Treasury yields have been driven higher by rising U.S. interest rates.”
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