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High-Yield ETF Outdueling Core Bond ETF

This article was originally published on ETFTrends.com.

The iShares Core US Aggregate Bond ETF (AGG) tracks the investment results found in the Bloomberg Barclays U.S. Aggregate Bond Index, which can give fixed income investors broad exposure to the bond markets. However, there are times when higher yields can be extrapolated from looking at options like the SPDR Blmbg BarclaysST HY Bd ETF (SJNK), which has been outdueling the AGG on a year-to-date basis.

SJNK has returned 3.12% year-to-date, 4.09% the past year and 5.53% the last three years, while AGG is down 1.11% YTD. Additionally, AGG is down 1.26% within the past year, but up 1.70% in the last three years--a case that deconstructing the AGG to corner specific areas of the bond market, high-yield in this particular case, could be more profitable.

High-Yield ETF Outdueling Core Bond ETF Year-to-Date 1

SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade.

Just like the first quarter of 2018, high-yield bond strategies led a Morningstar Inc list of top fixed-income performers again during the second quarter, taking seven out of the top 10 spots. As investors continue to be a in a risk-on mentality, a shift away from save haven government debt has been accompanied by high-yield bond strategies outperforming their investment-grade counterparts by an average of 2%.

“In the current environment, where the economic and corporate backdrop remain promising, corporate bonds should fare better than developed market sovereign debt,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.  “Similarly, even if the anticipated total returns are modest, the riskiest section of corporate bonds, known as “junk bonds”, should beat higher-grade corporate bonds.”

 Additionally, Craig cites that its been high-yield, below-investment grade debt outperforming its higher credit quality peers.

“More favourable fundamentals still bode well for the high-yield segment of the corporate bond market,” said Craig. “Investment grade credit indices have experienced a deterioration in credit quality and a commensurate rise in duration and leverage adding to vulnerabilities as interest rates rise.”

"The US high-yield market hasn’t experienced the deterioration in quality of its higher-quality cousin, as both the duration and the quality of the index have remained stable. The still-vibrant US economy will support high-yield corporate finances, keeping spreads contained," Craig added.

For more trends in fixed income, visit the Fixed Income Channel.