Junk Bond ETFs Gain Traction Despite Risk-Off Environment

ETF Trends

Undaunted by the recent volatility in risky assets, some investors are turning to speculative debt and junk bond exchange traded funds as they buy on the short-term dips.

“A real dramatic freefall is unlikely in our opinion,” Michael Buchanan, a manager at Western Asset Management Co., said in a Bloomberg article. “We were buyers on days of weakness over the past couple weeks.”

Western Asset and AllianceBernstein Holding LP argue that the global economy is strong enough to withstand short-term shocks, like the weakness in the emerging markets, as central banks promote growth through accommodative measures. [Bond ETFs See Best Start Since ’08]

According to a press release, Western Asset Management partnered with WisdomTree (WETF) on global fixed income products. WisdomTree offers actively managed emerging market local-debt-denominated bond ETFs, including the WisdomTree Emerging Markets Local Debt Fund (ELD) and WisdomTree Asia Local Debt Fund (ALD) .

Bank of America credit strategists led by Hans Mikkelsen advised investors to “consider the recent emerging-market sell-off a buying opportunity” as yield on investment-grade bonds widened an average 9 basis points to 1.28% against the Treasuries since Jan. 22, and spreads on junk bonds worldwide rose 44 basis points to 4.55%, the highest in over two months.

Moreover, credit outlook seems stable with default rates hovering below historic averages. The U.S. speculative-grade default rate dipped to 2.2% in the fourth quarter from 2.7% in the third quarter and from 3.4% in 2012.

“Underlying corporate credit fundamentals are very strong, balance sheets are healthy, default rates are falling from even low levels, corporate earnings are solid,” Edward Marrinan, a credit strategist at RBS Securities, said in the article. “When taken all together, I think credit investors are rather confident that their asset class will be supported.”

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) , the two largest U.S. high-yield bond ETFs by assets, are up 0.2% and 0.1% year-to-date, respectively. Despite heavy outflows

The PowerShares Senior Loan Portfolio (BKLN) , a floating-rate, high-yield, speculative-grade debt, senior loan ETF, which tracks the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, has gained 0.6% in January, marking the first time since October 2012 that floating rate debt has risen even though the S&P 500 index fell. [Investors Flock to Floating Rate ETFs on Interest Rate Concerns]

Additionally, Pacific Investment Management Co. and Loomis Sayles & Co. are taking a closer look into emerging market bonds. Dan Ivascyn, a co-manager at PIMCO, sees potential opportunities in shifting from junk-rated corporate debt to “some of the higher-quality assets within the emerging markets.”

The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , which tracks U.S. dollar-denominated emerging market debt, holds about 58% of it weight in investment-grade debt. EMB is down 0.3% year-to-date.

For more information on speculative grade debt, visit our junk bonds category.

For full disclosure, Tom Lydon’s clients own shares of HYG and JNK.

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