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5 Junk Bond ETFs That Could Shine

Todd Shriber

Last year, high-yield corporate bond exchange-traded funds (ETFs) struggled. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA:JNK), the two largest U.S. junk bond ETFs, lost 2% and 3.3%, respectively, in 2018.

With investors renewing their risk appetite early in 2019, junk bond ETFs are rebounding. As of Feb. 15, HYG and JNK are up an average of 6% this year. Broadly speaking, the resurgence of junk bond ETFs is a positive for equity investors. High-yield corporate debt is one of the riskier corners of the bond market, and with the correlations of this asset class to equities, investors’ appetite for junk bonds is often seen as predictive for equities.

There are some words of cautions investors should heed before running into junk bond ETFs over the near term. Notably, some market observers see high-yield corporate bonds as pricey, which could signal the end of the current economic expansion.

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“That could be bad news, especially because the prices of risky assets like stocks and high-yield bonds tend to overrun fundamentals toward the end of economic expansions,” according to Barron’s.

For investors willing to take on some added risk in search of higher yields, here some junk bond ETFs to consider right now.


Junk Bond ETFs: Xtrackers Low Beta High Yield Bond ETF (HYDW)

Expense Ratio: 0.25% per year, or $25 on a $10,000 investment.
Trailing-12-Month Yield: 4.3%

The Xtrackers Low Beta High Yield Bond ETF (NYSEARCA:HYDW), which tracks the Solactive USD High Yield Corporates Total Market Low Beta Index, is one of the junk bond ETFs that is ideal for investors looking to reduce some of the volatility associated with this asset class.

The objective of this junk bond ETF is to target higher-quality issues with less beta relative to the broad high-yield corporate bond market. As such, HYDW features barely any exposure to highly speculative CCC-rated bonds. Over 97% of the fund’s holdings are rated BB or B. In terms of lowering beta, this junk bond ETF does that with a beta of just 0.23.

HYDW has a modified duration to worst of 3.6 years and a yield to worst of 5.85%. While lower beta junk bonds may yield less than traditional junk bonds, HYDW’s trailing 12-month yield of 4.3% is still solid. Over the past year, HYDW’s upside capture ratio is 70.32%.


VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM)

Expense Ratio: 0.4%
TTM Yield: 5.5%

High-yield corporate bonds are not confined to the U.S. There is a big universe of these bonds issued by companies outside the U.S., and the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEARCA:HYEM) is one of the top junk bond ETFs for accessing emerging market high-yield corporate debt.

Home to $255.30 million in assets under management, HYEM follows the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index. That benchmark is comprised of dollar-denominated bonds.

HYEM holds nearly 500 bonds, over 30% of which are issued by Chinese, Brazilian or Turkish companies. This junk bond ETF compensates investors for the risk with a 30-day SEC yield of 7% and a trailing-12-month yield of 5.5%. HYEM’s effective duration is 3.5 years.

“Emerging markets high yield corporate bonds have historically provided a yield advantage over their U.S. counterparts, though the relationship has inverted several times historically,” according to VanEck. “The real and perceived additional risks associated with emerging markets, including political and liquidity risks, have generally led investors to demand a higher yield from an emerging market corporate bond versus a U.S. one, assuming all else equal (e.g., same industry and credit rating).”


WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (SFHY)

Expense Ratio: 0.38%
TTM Yield: 5%

An overlooked option in the junk bond ETF arena, the WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (NASDAQ:SFHY) has the dual advantages of lower duration and an emphasis on higher-quality debt.

SFHY’s underlying index, the WisdomTree Fundamental U.S. Short-term High Yield Corporate Bond Index, is designed to identify domestic high-yield corporate bonds with favorable fundamental and income traits.

“The HY corporate market, as represented by the Bloomberg Barclays U.S. Corporate High-Yield Index, experienced a bit of a whipsaw effect last year,” said WisdomTree in a recent note. “The market saw positive, albeit modest, gains through the first three quarters of last year, as spreads remained low to flat. However, the fourth quarter saw a drop-off across all classes, and market performance took a significant hit, ending the year in negative territory.”

SFHY’s effective duration is just 2.14 years, but its 30-day SEC yield is 5.1% and its TTM yield is 5%.


SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)

Expense Ratio: 0.35%
TTM Yield: 4%

As its name implies, the SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA:HYMB) is a junk bond ETF dedicated to high-yield municipal bonds, not corporate debt. This is one of the better junk bond ETFs for conservative investors looking for an added yield kick to high-grade municipal bond exposure.

Due to the fact that HYMB focuses on municipal bonds, this junk bond ETF is usually less volatile than its more traditional rivals. Over the past three years, HYMB’s annualized volatility was just 4% compared to an average of 5.75% for HYG and JNK.

HYMB holds about 1,350 bonds, about 47% of which are healthcare or industrial revenue bonds. Nearly 29% of the fund’s holdings are special tax or education bonds. Debt issued by municipalities in California and Illinois combine for over 23% of HYMB’s roster.

HYMB has an option-adjust duration of 8.8 years, a 30-day SEC yield of 4.2% and a TTM yield of 4%.


IQ S&P High Yield Low Volatility Bond ETF (HYLV)

Expense Ratio: 0.4%
TTM Yield: 4.2%

The IQ S&P High Yield Low Volatility Bond ETF (NYSEARCA:HYLV) is just two years old, but in those two years, the fund has become one of the best junk bonds ETFs for investors looking to trim volatility. HYLV targets the S&P U.S. High Yield Low Volatility Corporate Bond Index.

That index “is designed to measure the performance of U.S. high yield corporate bonds with potentially low volatility. The index is comprised of bonds from the S&P U.S. High Yield Corporate Bond Index and is a modified market value weighted index with a 3% cap on any single issuer,” according to S&P Dow Jones.

HYLV holds just over 400 funds with an effective duration of 4.24 years. As a volatility reducing strategy, this junk bond ETF’s holdings are on the higher end of the high-yield ratings spectrum as about 84% of the fund’s holdings are rated BB+, BB or BB-. At the end of last year, HYLV had a 30-day SEC yield of 5.6%.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

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