Junk Bond ETFs Did Their Jobs as Stocks Tumbled
This article was originally published on ETFTrends.com.
High-yield corporate bond ETFs acted as expected during the recent equity market stress, providing efficient vehicles for price discovery as some junk-rated debt was pinched alongside stocks.
The iShares iBoxx $ High Yield Corp Bd ETF (HYG) is the largest high-yield corporate bond ETF in the U.S. HYG tracks the investment results of the Markit iBoxx USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. HYS seeks to provide total returns that closely correspond to the ICE BofAML 0-5 Year US High Yield Constrained Index, which is comprised of U.S. dollar denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market with remaining maturities of less than 5 years.
“Yields on bonds rated below investment grade are the highest since November 2016, jumping to 6.61 percent on Wednesday from 6.18 percent on Oct. 1, according to Bloomberg Barclays index data. They’ve already lost more than 1 percent in October, on pace for the worst monthly performance in almost three years,” reports Bloomberg.
Related: The Positives and Negatives of Bonds
Over the years, some market observers have been concerned about the role high-yield bond ETFs play in that market's liquidity, but data suggest ETFs like HYG actually enhance the junk bond market's liquidity.
“The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk,” said Krishna Memani, head of fixed income at OppenheimerFunds Inc., in an interview with Bloomberg. “The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate.”
Other Junk bond ETF Ideas
Junk bond ETFs that help investors add protection against rising interest rates are also proving popular with investors. That group of funds includes the ProShares High Yield—Interest Rate Hdgd (HYHG).
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
For more trends in fixed income, visit the Fixed Income Channel.
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