Junk Bond ETFs Stumble to Start 2022 | ETF Trends

Market volatility is spilling over into the bond markets as inflation and yields start to rise, but it’s especially been hard on junk bond exchange traded funds (ETFs) to start 2022.

All eyes will be on the Federal Reserve as it begins to tighten monetary policy and look to raise rates. Just how aggressive the central bank will be has yet to be determined given the current economic growth prospects, but it’s already adding a dose of volatility to both stocks and bonds.

The riskiest debt, in particular, has been feeling the pangs of the roller coaster fluctuations.

“The biggest exchange-traded funds that trace debt issued by below investment-grade or junk’ rated U.S. companies also have been swept up in recent market turmoil as the Federal Reserve looks to pivot to fighting inflation and reining in easy financial conditions,” a MarketWatch report notes, saying that John Hancock Investment Management’s co-chief investment strategists, Emily Roland and Matt Miskin, foresee a “deepening bond bear market” ahead.

Additionally, ETFs are also more sensitive to the latest market sell-offs. Because they package debt together in one fund, unloading ETFs is typically the first option when volatility strikes.

“ETFs often are the first thing investors in corporate debt sell to gain liquidity when volatility flares up, largely because they trade in an instant, unlike the underlying corporate bonds they reference,” MarketWatch adds.

Less Risk and Shorter Duration

Given the drop in high-yield debt, investors can opt for investment-grade debt while also limiting rate risk by getting shorter duration. Both those features are available in the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures, including all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued.

Highlights of BSV:

  • Seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
  • Invests in U.S. government, high-quality (investment-grade) corporate and investment-grade international dollar-denominated bonds.
  • Follows a passively managed, index sampling approach.

For more news, information, and strategy, visit the Fixed Income Channel.