More income investors are beginning to look into European speculative grade bond related exchange traded funds, as investors in Europe pick up high-yield debt at a record pace.
According to Dealogic, high-yield corporate debt issuers in Europe have sold a record €18.5 billion, or $26 billion, euro-denominated bonds since January, up 17% year-over-year, reports Ben Ednwards for the Wall Street Journal.
Meanwhile, European high-yield funds have attracted $13 billion so far this year, according to EPFR data. [Thriving European Junk Market Could Lift These ETFs]
The increased demand has helped push down yields on euro-denominated junk bonds to 4% last week, or two percentage points lower in the past year.
The market has seen “a race to the bottom in terms of covenant standards,” David Fancourt, a fund manager at M&G Investments, said in the article.
Nevertheless, some money managers argue that overall quality of European junk bonds have improved, pointing to an uptick of companies that previously held investment-grade ratings that are now given junk status after the debt crisis.
“Issuance this year has probably been of a higher quality than last year because the composition of the market has changed—there’s a lot more issuers now with higher ratings in there,” Arthur Milson, a fund manager at Standard life, said in the article. [Corporate Bond Issuance on the Rise]
Additionally, default rates remain relatively low. According to Moody’s Investor Service, European speculative grade debt default rates declined to 2.5% in the first quarter from 3.7% at the end of 2013.
While there are no Europe-focused speculative-grade debt ETFs on the market, investors can still access European high-yield bonds through international bond ETFs with heavy tilts toward European countries.
For instance, the Market Vectors International High Yield Bond ETF (IHY) includes a 10.5% exposure to U.K., 9.3% to France and 9.2% to Italy. IHY has a 0.40% expense ratio and a 4.4% 30-day SEC yield.
The SPDR International High Yield Bond ETF (IJNK) top European country weights include Italy 14.5%, U.K. 10.7% and Germany 10.0%. IJNK has a 0.40% expense ratio. The fund began trading on March 12, 2014. [ETF Spotlight: International Junk Bonds]
Top country holdings in the iShares Global ex USD High Yield Corporate Bond ETF (HYXU) include France 14.3%, Italy 14.1% and Luxembourg 12.5%. HYXU has a 0.40% expense ratio and a 3.07% 30-day SEC yield.
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.
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.