Short-Duration High-Yield Bond ETFs in ‘Sweet Spot’

Junk debt ETFs tracking bonds with shorter durations are finding a home in more portfolios as investors continue to scratch for yield but fret over the damaging impact of higher interest rates.

For example, PIMCO 0-5 Year High Yield Corporate Bond (HYS) and SPDR Barclays Short Term High Yield Bond (SJNK) have seen year-to-date inflows of $1.9 billion and $1.1 billion, respectively, according to IndexUniverse data.

The iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK) are the largest junk bond ETFs, and have longer durations. Investors have pulled $512 million from HYG and $2.5 billion from JNK so far this year. The two ETFs have experienced net inflows for July as their share prices recover after the swoon in May and June. [Amid Rebound, Cash Pours Into Junk Bond ETFs]

“Bond investors are concerned about the high-yield space,” said David Mazza, head of ETF investment strategy at State Street Global Advisors, which manages SJNK and JNK.

“SJNK is ideal exposure for taking on some credit risk and higher yields, while managing interest rate risk,” he said in a recent telephone interview. “SJNK is in the sweet spot.” [Investors Buying High-Yield ETFs with Shorter Durations for Rate Protection]

Indeed, rival BlackRock is planning its own short-duration junk bond ETF. The firm manages HYG, which holds about $15.5 billion of assets. [iShares Files to Launch Short-Duration, High-Yield ETF]

Some ETF providers have recently launched ETFs tracking high-yield corporate bonds, but with built-in hedges that protect against rising interest rates. [High-Yield ETFs with Rate Guards]

Also, PowerShares Global Short Term High Yield Bond Portfolio (PGHY) takes a more international approach.

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

Story updated to add global high-yield bond ETF.

The opinions and forecasts expressed herein are solely those of John Spence, 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.