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Why Trading, Assets in High-Yield Bond ETFs are Exploding


The two largest high-yield bond ETFs alone have pulled in nearly $8 billion of fresh assets this year as investors clamor for income in a low-interest-rate environment.

In fact, trading in high-yield ETFs is rising at a faster rate than transactions in the underlying junk debt “as buyers seek a faster way to take advantage of a market returning 15.5%this year,” Bloomberg News reports.

Year to date, iShares iBoxx High Yield Corporate Bond (HYG) has seen net inflows of $4.6 billion while SPDR Barclays High Yield Bond (JNK) has hauled in $3 billion, according to IndexUniverse data.

The funds are paying 30-day SEC yields of more than 5% while yields on 10-year Treasury notes are hovering around 1.8%.

“Speculative-grade bond ETFs are attracting record amounts of cash this year as Federal Reserve efforts to stimulate the economy by holding interest rates at almost zero since 2008 push investors into riskier assets,” according to Bloomberg. “Bond buyers from retirees to the biggest banks are increasingly using shares of high-yield bond ETFs for fast access to debt with an annualized return of 21.8% since 2008, even as the risk of losses tied to rising interest rates is the greatest since 2007.” [Investors Bet Against Junk Bond ETF]

After such a strong run, high-yield bond prices have risen so much and yields pushed so low that there are worries investors buying now aren’t being adequately compensated for holding speculative-grade debt. [High-Yield ETFs Rallying to Cap Historic Year]

According to fixed-income portfolio manager David Schawel, the spread between junk-bond yields and the S&P 500 earnings yield recently turned negative for the first time ever, “showing just how much the yields on high-risk bonds have come down as central banks keep benchmark borrowing rates depressed and investors search further out on the risk spectrum for yield,” Business Insider reports.

Still, junk-bond ETFs continue to march higher and there just aren’t many other options for investors seeking yield. [Senior Bank Loan ETF Offers High-Yield Alternative]

Volumes in the three largest high-yield ETFs increased to a daily average of $587.83 million this year, or 11.5% of daily trading in the bonds, Bloomberg reports. That’s up 90% from last year, when the amount trading was equivalent to 7.3% of trading in the underlying bonds.

“Rising volumes are inevitable with an outperforming asset class,” said Neal Epstein, a senior credit officer at Moody’s Investors Service, in the story.

The five-biggest junk ETFs have increased their holdings to $30.8 billion since the first such fund began in 2007, according to Bloomberg.

iShares iBoxx High Yield Corporate Bond


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

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.