U.S. Markets closed

Why HYG ETF falls into the high risk-high return catagory

Avik Chowdhury

Head-to-head: A comparative analysis of bond ETFs (Part 2 of 4)

(Continued from Part 1)

HYG is the iShares iBoxx High Yield Corporate Bond ETF that tracks liquid High Yield bonds. The underlying securities of the ETF are liquid U.S. dollar-denominated, high yield corporate bonds for sale in the U.S. As of February 14, 2014, the price of the ETF was $93.91. For the past 52-weeks (one year), the price of the ETF has moved between $85.24 and $93.25. The current price of $93.91 has topped its previous 52-week high. The table below captures the return for HYG and Barclays U.S. AGG Bond Index, the bond index it tracks.

In terms of absolute returns over the past three-year and five-year periods, HYG has outperformed Barclays Capital U.S. Aggregate Bond Index, a prime ETF tracker. The conclusion, however, changes when we use the Sharpe ratio (or SR), which is as a more accurate measure of risk-return analysis. Here, the risk-free rates being used are three-year and five-year Treasury yields.

Given below is a table showing the riskiness of HYG versus Barclays U.S. AGG Bond Index in terms of standard deviation (SD) and the SR for different time periods.

Time Period HYG Standard Deviation Corporate Bond Standard Deviation Average Treasury Rate HYG Sharpe Ratio Bond Sharpe Ratio
3 years 7.32 2.83 0.54 0.97 1.22
5 years 13.83 2.87 1.51 0.86 1.17

The bond index has been less volatile as displayed by lower SD over the years. For three years, the Barclays Bond Index has had a standard deviation of 2.83; and 2.87 for five years. For both the three-year and five-year periods, SR was higher for the bond index than that of HYG. In other words, the bond index outperformed HYG in the past three and five years on a risk-adjusted basis. So, investors were better off investing in bonds. Based on these results, it’s obvious that HYG ETF falls into the high risk-high return category versus the bond index it tracks. The beta of HYG is 0.30, that is, if the Barclays U.S. AGG Bond Index moves by 1%, HYG moves by 0.30% in the same direction. It implies that the fund would less volatile than the index it tracks, and so, provides some cushion when market goes down. However, when market goes up, it limits the ETF’s rewards.

Continue to Part 3

Browse this series on Market Realist: