Underscoring the rising popularity of fixed income exchange traded funds (ETFs), four such funds are among this year’s top 10 asset gatherers. Not far behind those four are some of the major high-yield corporate bond ETFs.
For example, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the second-largest high-yield corporate bond ETF, has seen year-to-date inflows of $2.56 billion.
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. While high-yield bonds and ETFs like JNK took some lumps last year as the Federal Reserve boosted interest rates four times, the asset class remains a prime avenue for increasing income streams.
“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,” according to State Street.
Focus On Fixed Income Flows
The majority of assets have flowed into U.S. government and so-called Aggregate bond index funds. However, more recently, fixed income ETFs saw their highest ever first quarter inflows as investors have piled money into high yield and mortgage-backed debt. After coming under pressure in 2018, bond segments have broadly rallied over the first three months of the year, with credits and emerging markets strengthening amid falling yields.
JNK, which has an option-adjusted duration of 3.56 years, has a 30-day SEC yield of 5.70%. JNK and rival ETFs make for solid complements to traditional aggregate bond ETFs and Treasuries because high-yield corporate debt usually has low correlations to those asset classes.
“Since 1990, high yield bonds have had a negative correlation to treasuries and a very low correlation to both US and global aggregate bonds,” according to State Street. “From a portfolio risk perspective, this allocation away from treasuries or aggregate bonds to high yield changes the risk dynamics of the portfolio, as it swaps interest rate risk for credit risk, further diversifying the portfolio.”
For more on the bond market, visit our Fixed Income Channel.