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Vanguard Demurs on High-Yield Bond ETFs


High-yield bond ETFs have sold like hotcakes in a low-interest-rate environment with investors taking on more risk in their quest for yield. However, don’t expect Vanguard to pile in on this popular segment with its own ETFs.

The index fund and ETF giant is “staying away from offering such a product, not because of any particular view on its outlook or its benefit to a portfolio but because of the way high-yield-bond ETFs trade,” reports Jason Kephart at Investment News.

The iShares iBoxx High Yield Corporate Bond Fund (HYG) and SPDR Barclays High Yield Bond ETF (JNK) are the two largest junk bond ETFs. In 2012, they gathered inflows of $4.5 billion and $3 billion, respectively, according to IndexUniverse data.

However, the two high-yield ETFs have experienced outflows so far in 2013 amid rumblings in the junk debt market. Investors have pulled $870.7 million from HYG, which is managed by BlackRock’s iShares, and $676.7 million from JNK, which is sponsored by State Street, year to date. [Junk Bond ETFs: Are 5% Yields Worth the Risk?]

Still, high-yield bond ETFs have been big sellers at those two providers. State Street and iShares have seen their high-yield bond ETF assets more than quintuple to $27 billion combined since 2009, according to the Investment News report.

Ken Volpert, head of taxable bonds at Vanguard, in the story noted that junk debt ETFs can trade at premiums and discounts to net asset value, since high-yield bonds are relatively illiquid. [Look Before You Leap Into High-Yield Bond ETFs]

“Those swings hurt the average investor if they’re following the crowd,” Volpert said.

Indeed, high-yield bond ETFs can trade at premiums or discounts based on buying demand and selling pressure. [High-Yield Bond ETFs Trading at Discount After Pullback]

“There’s an opportunity to make money if you’re on the right side of the trade,” Volpert said in the report. “At this point, we think the average investor is better off in a mutual fund.”

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.