The King of Junk Bond ETFs

Dozens of exchange traded funds offer investors exposure to high-yield corporate bonds. The largest remains the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG).

Speculative-grade debt and junk bond-related exchange traded funds are attracting greater attention among yield seekers, but some institutions are warning investors to not go overboard with this risky asset.

Amid expectations that the Federal Reserve will continue raising interest rates this year, some fixed income investors are growing skittish with high-yield corporate debt and the related ETFs. Corporate debt is reaching its highest level since before the financial crisis, which has caused Moody’s to warn that substantial trouble is ahead for junk bonds when the next downturn arrives.

HYG, which turned 11 years old earlier this year, tracks the Markit iBoxx USD Liquid High Yield Index and holds nearly 1,000 high-yield corporate bonds.

The Details Behind ‘HYG’

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 has an effective duration of 3.75 years. Duration measures a bond’s sensitivity to changes in interest rates. The Federal Reserve has boosted interest rates twice this year and some bond market observers believe two more rate hikes are in the offing before the end of 2018. Still, HYG has traded modestly higher on a year-to-date basis.