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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Speculative-grade debt and junk bond exchange traded funds have strengthened as investors search for higher yielding assets in a low-rate environment. However, the greater demand has depressed yields, and some observers warn that high-yield debt may not be worth the greater risks.
“Gven the rapid, volatile downside movement in the shares over the past month, this surge in pessimism isn’t terribly surprising (currently, Trade-Alert places HYG’s 30-day historical volatility of 5.3% in the 81st percentile of its annual range),” notes Schaeffer’s. “Yet it’s worth noting that HYG, in recent days, has not only found its footing near key double-barreled support — but the ETF has also rallied sharply from this technical floor, simultaneous with a resurgence in net inflows in recent days, per etf.com, that have narrowed the fund’s month-to-date net outflows to $97 million.”
The $19.2 billion HYG has a 30-day SEC yield of 5.12% and an effective duration of 3.57 years. The ETF holds 1,033 junk-rated corporate bonds.
For more on bond ETFs, visit our Fixed Income category.