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Active High-Yield Bond ETF Bucks Outflow Trend as Rates Rise


Junk bond bulls are probably happy to see May come to a close. The fifth month of the year was unkind to high-yield bonds with the group on pace for its monthly loss in a year. The pain, modest for now, is being felt at the fund level.

“High-yield funds in the U.S. reported $875 million of withdrawals this week, the biggest outflow since February,” reports Lisa Abramowicz for Bloomberg, citing Lipper data. A surge in new junk bond issuance and concerns that rising interest rates, which boost yields on less risky U.S. Treasurys, are seen as weighing on high-yield bond funds.

The largest ETFs tracking the asset class have been unable to escape the carnage in May. The iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) are both headed for monthly losses of around 2% and both ETFs have seen significant outflows this month. Through Thursday, investors pulled over $740 million from HYG and more than $765 million from JNK, according to Index Universe data.

In a sign that investors are starting to show a slight preference for active management when it comes to high-yield bonds, the AdvisorShares Peritus High Yield ETF (HYLD) has avoided the outflows while outperforming HYG and JNK this month. HYLD is on pace for a monthly loss of just half a percent and has attracted almost $23.5 million in new assets this month. Through Thursday, HYLD had nearly $275 million in assets, according to issuer data.

Relative to HYG and JNK, HYLD has toiled in anonymity, but that is starting to change. In mid-April, HYLD had $210.8 million in assets under management and average daily volume of less than 40,000 shares. The volume number has more than doubled to over 81,000 shares per day. [High Yield Bond ETFs That Protect Against Rising Rates]

In another sign that active management with junk bonds can work for investors, HYLD’s duration, or the ETF’s sensitivity to interest rate changes, was 3.2 years as of mid-April, but has since fallen to 2.96 years. By comparison, HYG’s effective duration is almost four years while JNK’s modified adjusted duration is nearly 4.3 years.

Instead of following passive benchmarks designed to mirror the U.S. High Yield Corporate market, HYLD employs an actively managed approach that seeks the right mix of individual corporate bond issues and according to the issuer’s literature, “Peritus takes a value-based, active credit approach to the markets, largely foregoing new issue participation, favoring instead the secondary market where Peritus believes there is less competition and more opportunities for capital gains. Peritus de-emphasizes relative value in favor of long-term, absolute returns.” [High Yield Bond ETF Takes An Active Approach]

Investors are taking notice of HYLD’s advantages, which include a 12-month yield of 8.03%, roughly 160 basis points better than HYG’s. “Keep an eye on HYLD (Peritus High Yield), as shares outstanding grew by 5 units after some recent creates in the fund,” said ETF liquidity provider in a new research note. That could prove to be sound advice, particularly if interest rates spike.

Peritus High Yield ETF

ETF Trends editorial team contributed to this report.

Tom Lydon’s clients own HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.