The biggest junk bond exchange traded funds by assets are paying yields in the 7% range but these ETFs come with unique risks, including premiums and discounts to net asset value.
SPDR Barclays Capital High Yield Bond ETF (JNK - News) and iShares iBoxx High Yield Fund (HYG - News) were down for the fourth straight session on Thursday although they pared early losses on heavy trading volume. [Investor Uses High-Yield ETF for Camouflage]
Some investors watch high-yield ETFs as an indicator of risk in the corporate debt markets. The funds’ recent slide has pushed them below the 50-day simple moving average. [Junk Bond ETFs Aren’t Sounding the Alarm Yet]
Also, JNK and HYG are trading at a discount to net asset value amid the selling pressure.
“High yield ETFs will at times trade at premiums or discounts to their underlying net asset values,” IndexUniverse explains. “These premiums and discounts reflect investor demand for the ETFs. When buying interest is strong, premiums increase. When more investors are selling, premiums decline. During periods of high yield market stress high yield ETF premiums and discounts can have wider swings. This is a reflection of the illiquidity and volatility of the underlying high yield bond market.”
As of May 16, HYG was trading at a 2% discount, while JNK’s discount was at 1.7%, according to investment researcher Morningstar.
Junk bond ETFs have been very popular with investors seeking to boost income. JNK and HYG each hold more than $10 billion in assets.
The corporate debt funds have fatter yields because investors are holding lower-quality bonds. High-yield ETFs are sensitive to the economy and default levels, which have remained low despite the lingering stress from the financial crisis.
SPDR Barclays Capital High Yield Bond ETF