A Technical Test For a Big Junk Bond ETF

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), the largest exchange traded fund tracking high-yield corporate debt, has traded slightly lower over the past month. Although HYG’s decline over that period is modest, some traders are expressing concern about the ETF’s near-term technical outlook.

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 more closely tracks its underlying index as the fund accurately reflects the prices avail­able to the fund – mew bonds are added to the index at the ask but are subsequently priced at the bid, which helps reduce the gap with its index, but this also reduces the index’s return.

“Bears appear to smell junk-bond blood in the water, as short interest on HYG ramped up 9.1% in the latest reporting period to hover around seven-month highs. And total put open interest on the fund checks in at 2.09 million contracts, easily dwarfing the 663,539 open call positions on HYG,” according to Schaeffer’s Investment Research.

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