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Junk Bonds Back in Fashion: 5 ETFs to Play the Trend

·5 min read

The junk (high yield) bonds have gained momentum lately with investors rushing back into this space. This is especially true as U.S. junk bonds saw inflows of $2.3 billion of cash in the week ended Oct 20, the biggest influx since the week ended Apr 7, according to Refinitiv Lipper data. This shows a shift in risk appetite following two straight weeks of outflows, including a $1.8 billion withdrawal last week, the most since June.

Inside the Popularity

An improving U.S. economy will continue to keep default rates at lower levels and tighten spreads, making these junk bonds attractive. Additionally, the Fed has signaled the tapering of massive bond-buying as soon as this year followed by interest rate hikes as early as next. This will hurt bond prices as yields and prices have an inverse relationship. The impact of this has already been felt as yield on 10-year Treasury notes climbed to above 1.67%, the highest level since mid-May (read: ETFs to Play Higher Benchmark Treasury Yields).

In fact, rates have been increasing since September, leading to losses for investment-grade. This has made junk bonds more attractive as these provide cushion against rising interest rates as these are generally less sensitive to interest rate fluctuations while offering outsized yields. Further, yields in this sector offer a significant premium over the more highly rated Treasury bonds. The high yield bonds tend to outperform the other corners of the fixed income market when the economy is in full swing. And given the low default rates, the hefty yield premium could be worth chasing.

Bill Zox, a high-yield bond portfolio manager at Brandywine Global Investment Management, said “a rally in equities was also helping drive demand, while a better chance of generating positive inflation-adjusted yields compared to the investment-grade market is another factor.”

Yield-hungry investors find it difficult to ignore this opportunity to tap meaty dividends. While there are a number of options in this segment, we have highlighted the five most popular ETFs that could maximize investors’ returns while maintaining low correlated assets, and thus could be high quality picks (read: ETF Strategies to Play Rising U.S. Treasury Yields).

Though many of these ETFs might have a Zacks Rank #4 (Sell), these have the momentum to move higher with the solid junk bond market fundamentals:

iShares iBoxx $ High Yield Corporate Bond ETF HYG

This fund offers exposure to a broad range of U.S. high yield corporate bonds and follows the Markit iBoxx USD Liquid High Yield Index. It holds 1,335 bonds in its basket with an average maturity of 4.12 years and an effective duration of 3.80 years. The ETF has amassed $20 billion in its asset base while trades in volume of 21 million shares per day on average. It charges 48 bps in annual fees.

SPDR Bloomberg Barclays High Yield Bond ETF JNK

This ETF provides a diversified exposure to U.S. dollar-denominated high-yield corporate bonds with above-average liquidity by tracking the Bloomberg Barclays High Yield Very Liquid Index. It holds 1,255 bonds in its basket with an average maturity of 6.25 years and adjusted duration of 3.73 years. The ETF has AUM of $9 billion in its asset base while trades in an average daily volume of 7.3 million shares. It charges 40 bps in annual fees.

iShares Broad USD High Yield Corporate Bond ETF USHY

With AUM of $8.2 billion, this product tracks the ICE BofA US High Yield Constrained Index and holds 2,155 bonds in its basket with average maturity of 4.88 years and effective duration of 4.19 years. It trades in an average daily volume of 1.5 million shares and charges 15 bps in annual fees.

SPDR Blackstone Senior Loan ETF SRLN

It is actively managed ETF seeking to outperform the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Senior Loans. It holds 313 bonds in its basket with an average maturity of 5.15 years. With AUM of $7.8 billion, the product trades in an average daily volume of 1.9 million shares and charges 70 bps in annual fees.

Invesco Senior Loan ETF BKLN

This fund follows the S&P/LSTA U.S. Leveraged Loan 100 Index, holding 149 securities in its basket with an average maturity of 4.84 years. It has amassed $6.8 billion in AUM and charges 65 bps in annual fees. The ETF trades in an average daily volume of 7 million shares (read: Fed Taper to Start in November? 7 ETFs to Buy).

Bottom Line

Investors continue to embrace high-yield bond ETFs for their portfolio thanks to outsized yields and the low default risk. Further, with a strengthening economy and Fed tapering in the cards, the demand for high-yield products will continue to rise.


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SPDR Bloomberg Barclays High Yield Bond ETF (JNK): ETF Research Reports
 
iShares iBoxx High Yield Corporate Bond ETF (HYG): ETF Research Reports
 
Invesco Senior Loan ETF (BKLN): ETF Research Reports
 
SPDR Blackstone Senior Loan ETF (SRLN): ETF Research Reports
 
iShares Broad USD High Yield Corporate Bond ETF (USHY): ETF Research Reports
 
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