Getting Cautious on Junk Bond ETFs

Related: A New Way for ETF Investors to Gain Aggregate Bond Exposure

HYG’s underlying index, the Markit iBoxx USD Liquid High Yield Index, also requires holdings to have at least $400 million in par value, and the debt issuer must have at least $1 billion in total debt outstanding. Due to their similar focus on liquidity, the two high-yield bond ETFs have similar portfolios.

HYG more closely tracks its underlying index as the fund accurately reflects the prices avail­able to the fund – mew bonds are added to the index at the ask but are subsequently priced at the bid, which helps reduce the gap with its index, but this also reduces the index’s return.

“Finally, not only is there more corporate debt, an increasing percentage of it is low quality. CCC issuance, the lowest tranche of the high yield segment, is once again growing as a percentage of total issuance. This trend generally precedes widening spreads and returns, as was the case during the 2015-2016 mini-selloff in high yield,” according to BlackRock.

For more information on the credit market, visit our bond ETFs category.