Overlooked High Yield ETFs Gain Traction
Takeaways
The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), previously the two largest high-yield ETFs, incurred $11 billion of net redemptions combined year-to-date through Oct. 11.
However, 13 high-yield corporate bond ETFs received net inflows of $100 million or more this year, according to CFRA data, as investors found alternatives.
The iShares Fallen Angels USD Bond ETF (FALN) gathered $3 billion of new money, while larger peer VanEck Fallen Angel High Yield Bond ETF (ANGL) gathered approximately $1 billion. The pair have a stronger credit profile than HYG and JNK.
Fundamental Context
Four out of the five largest U.S.-listed high-yield corporate bond ETFs are bleeding assets in 2021. Despite a strengthening U.S. economy and rising commodity prices in the key energy sector, many of the biggest corporate bond ETFs that take on elevated credit risk have been out of favor this year.
Assets for HYG, the largest such ETF, have been winnowed to $19 billion as of Oct. 11, down from $26 billion at the end of 2020 due to more than $6 billion of net outflows in 2021. Meanwhile, JNK’s assets shrunk to $8.1 billion, from $12.5 billion due to $4.5 billion of redemptions.
Among the larger high-yield corporate bond ETFs, HYG and JNK charge premium expense ratios of 0.49% and 0.40%, respectively, which provided opportunities for lower-cost alternatives. Indeed, the X-trackers USD High Yield Corporate Bond ETF (HYLB) gathered $3 billion in 2020 to boost its asset base to $7.5 billion, aided by its 0.15% expense ratio. However, HYLB’s assets have since narrowed to a recent $6.6 billion, hurt by approximately $800 million of net outflows in 2021.
Figure 1: Top 5 Largest High-Yield Corporate Bond ETFs
Ticker | Expense Ratio (%) | YTD Net Inflows ($M) | Assets ($M) |
0.49 | -6,327 | 19,426 | |
0.15 | 757 | 8,200 | |
0.40 | -4,467 | 8,049 | |
0.15 | -790 | 6,645 | |
0.30 | -262 | 5,516 | |
Sum | -11,089 | 47,836 |
Source: CFRA ETF Database. As of October 11, 2021.
The iShares Broad USD High Yield Corporate Bond ETF (USHY) is the second largest high-yield corporate bond ETF passing JNK. While 2021 has been a challenge for its peers, USHY gathered $757 million of new money to boost assets to $8.2 billion.
The iShares offering matches the 0.15% fee HYLB charges, and with more than 2,000 positions, USHY has double the number owned by older sibling HYG, providing some differentiation. Even with the demand for USHY, the five largest high-yield corporate bond ETFs, which manage $48 billion, already had more than $11 billion of net outflows in 2021.
Fallen Angels Shine
Fallen angel bond ETFs have gained traction in 2021. HYG, JNK and USHY invest in bonds rated BB (or equivalent) and below, regardless of whether the bonds were issued as high-yield securities or downgraded to the more speculative-grade ratings. However, ANGL and FALN invest in bonds that, when issued, were investment grade rated but were subsequently downgraded to their current junk-level status.
The $5.2 billion ANGL gathered approximately $980 million of net inflows year-to-date through Oct. 11, while peer FALN gathered $3 billion to turn this under-the-radar product into a much more liquid $3.4 billion offering.
Aided by distinct holdings, ANGL and FALN rose 4.2% and 3.1%, respectively, year-to-date through Oct. 11, stronger than JNK’s and HYG’s gains of 2.0% and 1.7%, respectively. ANGL and FALN recently had 92% and 91%, respectively, of assets in bonds rated BB, significantly more than HYG’s 56% and JNK’s 49% stakes, providing a stronger credit profile.
In 2020, $164 billion of fallen angel bonds came into ANGL’s index, according to VanEck, the largest year on record, as rating agencies considered the risks being faced by the COVID-19 pandemic.
While there were was only $10 billion of downgraded bonds entering ANGL in the first nine months of 2021, $13 billion worth of rising-star bonds were upgraded back to investment-grade status due to improved fundamentals.
Figure 2: Credit Quality Breakdown Of Select High-Yield ETFs (% of Assets)
Source: CFRA ETF Database. As of October 11, 2021.
Corporate Junk Bond ETFs Gain $100M
A total of 13 high-yield corporate bond ETFs gathered more than $100 million of net inflows this year. The SPDR Bloomberg Barclays Short Term High Yield Bond ETF (SJNK)) and the JPMorgan High Yield Research Enhanced ETF (JPHY) had the second- and third-highest cash hauls, behind FALN. Both ETFs gathered $1.1 billion.
The $1.6 billion JPHY is an actively managed ETF that uses in-house credit research to find potential value in the high-yield investment style while seeking to match the risk profile of its benchmark.
Meanwhile, the $4.7 billion SJNK is a less-interest-rate-sensitive version of JNK, with an average duration of recently under three years. Its recent demand contrasts with short-term peer SHYG, which has approximately $260 million of net outflows in 2021.
Figure 3: 5 Previously Under-The-Radar High-Yield Corporate Bond ETFs
Ticker | 2020 Assets ($M) | YTD Net Inflows ($M) | Current Assets ($M) |
4,075 | 978 | 5,169 | |
469 | 203 | 681 | |
410 | 2,978 | 3,435 | |
33 | 759 | 796 | |
491 | 1,080 | 1,571 | |
Sum | 5,478 | 5,998 | 11,652 |
Source: CFRA ETF Database. As of October 11, 2021.
The Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN) and the Xtrackers Low Beta High Yield Bond ETF (HYDW) are a few other high-yield funds that have been popular this year, gathering $203 million and $759 million, respectively.
As shown in Figure 3, five high-yield corporate bond ETFs that managed $5.5 billion in combined assets at the end of 2020 gathered $6 billion of new money thus far in 2021 to more than double the asset base to approximately $12 billion.
Conclusion
CFRA currently finds high-yield corporate bond ETFs to be more appealing to lower-yield fixed income ETFs that incur less credit risk.
However, investors are refreshingly choosing among these offerings based on costs and exposure rather than choosing a fund based on its asset base.
All of the views expressed in this research report accurately reflect the research analyst’s personal views regarding any and all of the subject securities or issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA’s Legal Notice at https://www.cfraresearch.com/legal/.
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