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Junk Bond ETFs Try to Shake Off Energy Pullback

Among fixed-income assets, speculative-grade junk bond exchange traded funds have been among the worst performers as a bout of volatility and concerns over the energy sector weighed on riskier assets.

Over the past three months, the SPDR Barclays High Yield Bond ETF (JNK) dipped 1.6% and iShares iBoxx $ High Yield Corporate Bond ETF (HYG) retreated 0.6%. In contrast, the iShares Core U.S. Aggregate Bond ETF (AGG) gained 2.8%.

The fall in oil prices and perceived risk in the energy sector raised credit concerns for many energy-related junk bond securities. Energy companies have been on a borrowing spree in recent years, expanding operations in the ongoing shale oil boom in the U.S., according to Alliance Bernstein.

Consequently, high-yield energy bonds made up about 15% of the Barclays PLC High Yield Index, more than any other single sector. While energy prices fell, the energy exposure dragged on the high-yield debt markets and related ETFs. [Corporate Bond ETFs: Oil-Induced Default Risks Are Overblown]

While passive index-based ETFs may help track junk bonds, investors can also consider actively managed options, with managers who will weave around trouble areas. For instance, the AdvisorShares Peritus High Yield ETF (HYLD) and First Trust Tactical High Yield ETF (HYLS) are two actively managed high-yield ETF options that investors can consider. [An Active ETF Approach to Junk Bonds]

HYLD still included a hefty tilt toward energy sectors, with 14% in oil exploration and production, 2% in oil refining and marketing and 3% in oil services. HYLS, though, does not include any energy exposure among its top positions but overweights media 13.6%, health care 11.1% and restaurants and leisure 10.2%.

The AdvisorShares Peritus High Yield ETF has shifted toward short-term securities and the ETF currently has a 2.42 year duration. HYLD also offers a very attractive 12.35% 30-day SEC yield. However, the fund comes with a 1.18% net expense ratio.

HYLS, on the other hand, takes a long-short approach. Specifically, the active ETF takes a 114.87% long position and includes a -14.5% short position in Treasuries to manage potential risks. The fund has a net average effective duration of 2.99 years, a 6.13% 30-day SEC yield and a 0.95% expense ratio.

For more information on speculative-grade debt, visit our junk bonds category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of JNK and HYG.

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.