Higher Yields, Regulation Drive Junk Bond ETF Boom

ETF Trends

Assets in junk bond ETFs have soared to over $30 billion as investors move into speculative grade corporate debt in search of more yield in a low-interest-rate environment.

In fact, ETFs are on track to overtake credit derivatives as a way to speculate on high-yield bonds, Bloomberg News reports. Tighter regulation in derivatives markets after the financial crisis is also driving the junk bond ETF boom.

High-yield ETFs are breaking out to new 52-week highs in the wake of the Federal Reserve’s QE3 program while U.S. Treasury funds are staggering as investors take on more risk and move away from safe havens. [High-Yield ETFs Climb to New Highs as Treasuries Languish]

For example, the average junk-bond yield has fallen to all-time lows. [Junk Bond ETFs Break Out as Yields Hit Record Low]

Junk bond ETFs include SPDR Barclays Capital High Yield Bond (JNK), iShares iBoxx High Yield Corporate Bond (HYG), PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS) and PowerShares High Yield Corporate Bond Portfolio (PHB).

JNK and HYG are the largest ETFs in the category and are offering yields around 6%.

“The value of corporate securities held by the five-largest junk ETFs almost doubled in the past year to a record $31.4 billion, while the net amount of protection bought or sold on the debt using the two current credit-default swaps indexes declined 3%to $35 billion,” Bloomberg reports.

The ETFs are growing at an average 5.2% monthly pace this year, which would put assets at more than $36.5 billion by year-end, according to the article.

“Product innovation is often the answer to regulatory change and I don’t think it’s any coincidence that we’ve seen this explosion of interest in fixed-income ETFs just at the point at which CDS as a product and asset class comes under pressure,” Will Rhode, director of fixed-income at research firm Tabb Group, told Bloomberg News.

iShares iBoxx High Yield Corporate Bond

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Full disclosure: Tom Lydon’s clients own HYG and JNK.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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