With the Federal Reserve likely hiking interest rates even higher in the coming weeks, advisors face challenges navigating the bond market. During a mid-July webcast VettaFi hosted with State Street Global Advisors and two ETF strategists, we asked advisors “What bond investment style is most appealing to add to client portfolios?” The two top selections were high yield credit/senior loans (32%) and ultra-short bonds (30%), with investment-grade credit or core bonds (20%), municipal bonds (15%), and long-term Treasuries (3.3%) receiving the remainder of the poll results.
Both high yield credit/senior loans and ultra-short bonds provide fixed income without taking on much interest rate risk as the other subcategories. Yet, they incur a notably different amount of credit risk. While ultra-short ETFs invest in relatively safe Treasuries and investment-grade bonds while providing modest income, high yield and senior loan funds own securities with more elevated default risk in exchange for significantly higher income.
The favorable advisor sentiment is encouraging to see, as the largest high yield ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), experienced $4.6 billion of net outflows in 2022, shrinking its asset base to $14 billion. HYG recently had a 30-day SEC yield of 7.8%.
Meanwhile, the largest senior loan ETF, the SPDR Blackstone Senior Loan ETF (SRLN), has incurred $1.8 billion of redemptions since May 1, nearly erasing all of the $6.6 billion ETF’s net inflows for the year. SRLN recently had a 30-day SEC yield of 5.1%.
However, there were higher-yielding bond ETFs in demand this year. For example, the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG), which has pulled in $187 million since the beginning of March. The $4.6 billion SHYG’s average duration of 2.6 years was lower than HYG’s 4.3 years, providing it with greater protection against rising rates. SHYG recently had a 30-day SEC yield of 8.5%.
The First Trust Senior Loan Fund (FTSL) gathered $637 million in 2022, even as the $3.4 billion actively managed ETF suffered net outflows in recent months. FTSL recently had a 30-day SEC yield of 5.5%.
Investors have also been gravitating to some of the more fundamentally constructed high yield corporate bond ETFs. One of the standouts has been the Xtrackers Low Beta High Yield Bond ETF (HYDW), which pulled in $272 million and is now a $1.2 billion ETF. HYDW invests in less volatile credits within the speculative-grade market. The fund was recently heavily weighted to the consumer discretionary and communications services sectors. HYDW recently had a 30-day SEC yield of 6.1%.
Another relatively popular higher-yielding and fundamentally focused ETF is the FlexShares High Yield Value-Scored US Bond Index Fund (HYGV). The $810 million HYGV, which uses profitability, solvency, valuation, and spread analytics to construct a more narrowly focused index, benefitted from $323 million of net inflows. HYGV was most heavily concentrated in the industrial sector. HYGV recently had a 30-day SEC yield of 10%.
Lower fees also can help an ETF gain traction. Indeed, the SPDR Portfolio High Yield Bond ETF (SPHY), which has a miniscule 0.10% fee compared to HYG’s 0.48%, gathered $221 million of new money this year to push its asset base to $710 million. SPHY recently had an SEC yield of 8.6%.
There are also targeted maturity ETFs like the Invesco BulletShares 2024 High Yield Corporate Bond ETF (BSJO), which only owns bonds that mature in two years. The $465 million ETF pulled in $85 million this year. BSJO recently had a 7.5% 30-day SEC yield.
Advisors told VettaFi that taking on credit risk through higher-yielding ETFs was relatively appealing. There are a variety of products worthy of consideration and due diligence.
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