Junk Bond ETFs Did Their Jobs as Stocks Tumbled

Over the years, some market observers have been concerned about the role high-yield bond ETFs play in that market’s liquidity, but data suggest ETFs like HYG actually enhance the junk bond market’s liquidity.

“The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk,” said Krishna Memani, head of fixed income at OppenheimerFunds Inc., in an interview with Bloomberg. “The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate.”

Other Junk bond ETF Ideas

Junk bond ETFs that help investors add protection against rising interest rates are also proving popular with investors. That group of funds includes the ProShares High Yield—Interest Rate Hdgd (BATS: HYHG).

HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.

For more trends in fixed income, visit the Fixed Income Channel.