Is It Time to Scale Back on High-Yield ETFs?

ETF Trends

High-yield corporate bond ETFs have been among the top-selling funds in 2012 after enjoying gains of more than 20% the past year.

The iShares iBoxx High Yield Corporate Bond (HYG) and SPDR Barclays Capital High Yield Bond (JNK) have gathered year-to-date inflows of $5.8 billion and $2.9 billion, respectively.

They are the two largest junk bond ETFs and are paying dividend yields of about 7%.

Now some money managers are cautioning so many investors jumping into junk bonds are creating bubble conditions that could end badly. [Cracks Showing in High-Yield Bond ETFs]

“So much money has flooded into the junk-bond market from yield-hungry investors that weaker and weaker companies are able to sell bonds,” The Wall Street Journal reports. “Credit ratings of many borrowers are lower and debt levels are higher, making defaults more likely. And with yields near record lows, they add, investors aren’t being compensated for that risk.”

Inflows to high-yield bond funds have climbed to a record this year at $34 billion, the newspaper says.

The rush to junk bonds and investors stretching for income are no surprise with the 10-year Treasury note yielding a paltry 1.7%. [Fixed-Income ETFs for Yield: Junk Bonds, Emerging Markets and More]

However, junk bond funds recently saw their first weekly outflow in four months.

“Investors might finally be dialing back their expectations for the junk bond market after its most recent foray into record-low yield territory and record-high dollar prices,” according to Barron’s. “This could be simply that the market’s taking a breather after shattering previous record-low yield levels.”

Other junk bond ETFs include PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS) and PowerShares High Yield Corporate Bond Portfolio (PHB).

Aside from above-average yields, some investors are bullish on junk bond ETFs due to low default rates and cleaner corporate balance sheets.

“Many investors also are wary of calling a top to the rally. Some did so last year, only to watch demand increase after the Federal Reserve pumped money into financial markets and pushed interest rates lower,” the WSJ reports.

“The Fed is essentially saying to private investors, ‘Get out, move, invest in places that have the ability to drive growth,’ and that bodes well for high-yield bonds,” said Sam Diedrich, portfolio manager at Pacific Alternative Asset Management Co., in the story.

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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