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Amid Rebound, Cash Pours Into Junk Bond ETFs


It was just two months ago that ETFs such as the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca:HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca:JNK) were thrown out with the bathwater amid Federal Reserve tapering and a sudden spike in interest rates.

From the FOMC announcement on May 22 through June 24, HYG and JNK lost a combined $2.7 billion in assets, according to Citigroup research. In the midst of what turned out to be panic selling, questions arose about liquidity in the high-yield corporate debt market and the ability of ETFs to function as intended during times of elevated market stress. [Junk Bond ETFs Thriving Again]

With the May/June slide behind them, junk bond ETFs are once again drawing interest from investors and the inflows data supports that assertion. Since the start of July, HYG has hauled in $1.1 billion in investments this month while JNK has raked in nearly $325 million, according Index Universe data.

The SPDR Barclays Short Term High Yield Bond ETF (NYSEArca:SJNK) , which has been embraced by investors due in large part to a modified adjusted duration of just 2.19 years, has pulled in almost $320 million this month. [Investors Jumping Back Into Junk Bond ETFs]

It is not just inflows that highlight investors’ renewed confidence in high-yield bond ETFs; it is price action as well. From its May peak around $96.30 to its June bottom, HYG lost 7.5%, but the ETF closed at $93.74 on Tuesday. JNK’s May peak to June trough decline equaled about $3.25 of which $2 has since been reclaimed. SJNK currently resides just 40 cents below its May high.

Bottom line: Junk bond ETFs may have been down in after the May 22 FOMC news, but they are no longer out.

Tightening spreads between junk bonds and U.S. Treasurys have helped the former reclaim some of the ground lost in May and June. Wide spreads between high-yield bonds and U.S. government debt can be a signal that investors are concerned about credit risk. Narrowing spreads indicate investors believe the issuers of high-yield are faring better in an improving economy and default risk is diminishing.

With the benefit of hindsight, it can be argued that the May/June slide for high-yield bond ETFs was a buying opportunity. Earlier this month, BlackRock, the world’s largest asset manager, upgraded its view on junk bonds to overweight from neutral. Guggenheim and Nuveen also sounded bullish tones on high-yield corporate debt, reports Ben Eisen for MarketWatch.

SPDR Barclays High Yield Bond ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.