This year, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds, as well as rival junk bond funds have been solid performers, but these funds have come under increased scrutiny as oil prices have remained low.
Slumping oil prices remain an issue for junk bond funds. Industry experts warn that more oil-and-gas companies could see already junk credit ratings pared if oil and natural gas prices remain low.
“Year-to-date, high yield and other spread products continue to produce solid returns. In the case of U.S. high yield, this is a bit surprising given the drop in oil prices, down around 10% year-to-date. After all, it was only 18 months ago that a plunge in oil prices, coupled with fears over Chinese growth, sent high yield plunging and credit spreads soaring. What has changed?,” said BlackRock in a recent note.
Even amid an environment that, at least on the surface, looks challenging for corporate bond ETFs, these products are proving popular.
With the Federal Reserve standing pat on interest rates and remaining vague on its bond tapering plans, yields on U.S. Treasuries dipped in the latter half of July, which helped fuel greater demand for alternative income-generating assets in a persistently low-yield environment. The additional risk-on sentiment toward corporate America in light of the rosy second quarter earnings season also helped lift the outlook on credit markets.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) experienced $1.6 billion in net inflows while the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) attracted $1.3 billion and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) brought in $814.3 million.
There are some positive factors for ETFs such as HYG as it pertains to lower oil prices.
“Today, low rated companies (CCC and below) make up a smaller portion of high yield energy issuers,” according to BlackRock. “High yield energy is now 13% of the Bloomberg Barclays High Yield Index as opposed to 17% in early 2016. That is roughly a 25% drop in its contribution to high yield spreads.”
For more on bond ETFs, visit our Fixed Income category.