The Definitive Guide to Junk Bond ETFs (HYG, JNK, SJNK)
For an asset class that isn't even 20 years old, exchange-traded products have certainly been on the receiving end of plenty of controversy. Blamed for everything from rising correlations to higher commodities prices to the May 2010 flash crash, ETFs have not been strangers to negative headlines.
In other words, finding new areas of concern, consternation, controversy and misunderstanding within the ETF universe should at this point be hard to do, but where there's a will to whip, a whipping boy will usually be found.
Following an usual $725 million redemption earlier this month in the $10.5 billion SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK), junk bond funds are now arguably the new ETF whipping boy. The Wall Street Journal claims investor interest in high-yield bonds is waning. Moody's Investors Service said earlier this week that the JNK trade resulted in the fund trading at a discount to its net asset value after trading at a premium to NAV for several months and that increased institutional trading of ETFs can put individual investors at risk.
Addressing the Moody's point, this is a ratings agency that still has an investment grade rating on Spain, so its credibility on shining the spotlight on what is and isn't bad for investors is dubious at best. The Journal article even acknowledges that since August 2011 there have been only three weeks that saw net flows out of junk bond funds, a period that saw almost $26 billion flow into such funds, but that's buried below the point about $2.46 billion being taken out of those funds in the most recent week.
What no one seems to care to acknowledge is that not only are junk bond ETFs increasing in number, but these new funds are doing pretty well right off the bat. As one example, Van Eck Global, the fifth-largest U.S. ETF issuer and parent company of Market Vectors, has introduced three new high-yield bond funds that have raked in a combined $39 million in AUM. That may not sound like much for three ETFs, but consider this: None of those ETFs is even two months old.
We'll let the market decide if junk bond ETFs are good or bad. For now, use this guide to navigate the expanding world of high-yield bond offerings.
iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) With over $14.3 billion in AUM, HYG is the big kahuna of junk bond ETFs. With an expense ratio of 0.5%, HYG holds 601 primarily U.S. issues. Consumer staples, financials, energy and telecommunications get double-digit sector allocations with industrials not far behind at 9.9%. Year-to-date, HYG is off 1.9%, but the fund has a 12-month trailing yield of 7.36% and pays a monthly dividend, two factors that explain why the fund has been so popular with investors.
SPDR Barclays Capital High Yield Bond (NYSE: JNK) In terms of AUM, JNK plays second fiddle HYG, but the SPDR fund is cheaper (0.4% in annual fees) and is more heavily traded. JNK is home to "just" 227 holdings, but its yield of 7.51% tops HYG. The SPDR fund has also slightly outperformed its iShares rival this year. For whatever reason, JNK appears to be more controversial than HYG and if the former violates support at $38, near-term downside could be significant.
SPDR Barclays Capital Short Term High Yield Bond ETF (NYSE: SJNK) With an average maturity of 3.33 years, SJNK is the short-term cousin to JNK. Before folks rush to say investors are fed up with high-yield bonds and the corresponding ETFs, they might want to do some fact-checking with SJNK. This ETF came to market in mid-March and already has more than $129 million in assets under management. SJNK also charges 0.4% and is home 261 issues, but the yield is just 0.68%.
PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSE: PHB) PHB is the PowerShares alternative to HYG and JNK and it might be the best alternative because it has outperformed its larger rivals on a year-to-date basis. PHB is small compared to HYG and JNK, but not small overall. The fund, which charges 0.5%, has $927 million in AUM.
Consumer discretionary, energy, financials and industrials dominate the sector mix. This fund holds almost 220 issues, yields nearly 5.4% and also pays a monthly dividend.
Market Vectors High-Yield Muni ETF (NYSE: HYD) The Market Vectors High-Yield Muni ETF is often left out of the traditional junk bond conversation and that's quite alright. While there has been plenty of talk about the demise of muni bonds, a situation that has yet to materialize a fund like HYD is one of the few high-yield bond options a conservative investors might feel comfortable with.
With an expense ratio of 0.35%, HYD is cheaper than the other funds mentioned to this point and the $620 million ETF garners overall and three-year four-star ratings from Morningstar. HYD yield 5.3% and pays a monthly dividend. As an aside, when other junk bond ETFs were hit on strong volume on Thursday, HYD touched a new 52-week high on above average trade.
Market Vectors Fallen Angel High Yield Bond ETF (NYSE: ANGL) ANGL debuted in mid-April and already has $10 million in AUM. So-called fallen angel companies are typically large, familiar companies that have lost investment-grade status where as many companies issuing high-yield bonds are smaller, more obscure and have never had investment-grade status. What investors need to know is that MOST, but not ALL of ANGL's holdings are non-investment grade. The fund charges 0.4% and is expected to pay a monthly dividend.
Market Vectors International High Yield Bond ETF (NYSE: IHY) The oldest of the three new Market Vectors junk bond ETFs, IHY is off to a fine start with almost $19 million in AUM in less than two months of trading. Most of IHY's issues mature in the one to 10-year time frame. IHY features issues denominated in euros, U.S. dollars, Canadian dollars or pound sterling issued in the major domestic or Eurobond markets.
Regarding IHY's currency exposure, it should be noted that less than a third of the fund's 90 holdings are denominated in euros and most are U.S. dollar-denominated.
Note IHY has a competitor in the form of the iShares Global High Yield Corporate Bond Fund (BATS: GHYG).
Market Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM) HYEM debuted earlier this month and already has almost $10 million in AUM. Clearly, the combination of emerging markets and high-yield bonds under one roof isn't for everyone, but EM debt is gaining a bigger footprint in the high-yield universe and has often outperformed comparable developed market fare.
China, Russia, Indonesia and Brazil combine for almost 39% of HYEM's country weight and the fund has a rival in the form of the...
iShares Emerging Markets High Yield Bond Fund (BATS: EMHY) This ETF actually debuted the same day as HYEM and charges more (0.65% compared to 0.4% for HYEM). EMHY is another fine example of look before you claim that junk bonds aren't in style anymore. Less than two months old and with a country mix that includes the likes of Venezuela, Nigeria, Lebanon, Ukraine and Hungary, EMHY has still managed to attract more than $14 million in AUM. HYEM and EMHY are the first two ETFs devoted to emerging markets corporate junk bonds.
iShares Global ex USD High Yield Corporate Bond Fund (BATS: HYXU) In the current market environment, owning HYXU is going to take some fortitude because "ex-USD" really means a 79.5% allocation to euro-denominated bonds. That probably explains why the new fund (it debuted April 3) has lost 6.6%. With an expense ratio of 0.4%, HYXU holds 102 issues and has over $23 million in AUM.
Other funds to consider: The iShares B - Ca Rated Corporate Bond Fund (BATS: QLTC), which debuted in late April, and the Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO), which does have some exposure to non-investment grade Latin American bonds.
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