October is proving to be a volatile month for equities with the S&P 500 approaching month-to-date losses of 6%, but junk bonds and the related exchange traded funds have been less bad.
The iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG), the largest high-yield corporate bond ETF by assets, and the Invesco Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB) are down an average of 1.50% this month.
Rising interest rates may not be hindering junk bonds as previously expected. Historical data indicate that this category has historically performed well in past rising rate environments – there have been 17 quarters since 1987 in which yields rose significantly and high yield bonds showed positive returns in 65% of the time.
Just like the first quarter of 2018, high-yield bond strategies led a Morningstar Inc list of top fixed-income performers again during the second quarter, taking seven out of the top 10 spots.
HYG tracks the investment results of the Markit iBoxx USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality.
PHB uses a smart beta methodology. More investors are looking into smart beta as an alternative to traditional bond indices, which tend to follow market capitalization-weighted methodologies that lean more toward indebted government or corporate issuers.
Risky Debt Performing Well
In what may come as a surprise to some bond investors, CCC-rated bonds, which are among the riskiest junk bonds, are performing well this year.
“On total return basis, CCC-rated have performed the best, with CCC-rated dollar junk bonds returning 4.4% this year, almost matching the dividend-reinvestment performance of the S&P 500, according to Bloomberg,” reports Seeking Alpha.
PHB, which tracks the RAFI Bonds US High Yield 1-10 Index, focuses on slightly higher quality corporate debt securities than its major competitors. The ETF features no exposure to CCC-rated bonds. Three-quarters of PHB’s 239 holdings are rated BBB or BB.
For more information on the bond market, please visit our Fixed Income Channel.