Market Overview

Global Funds Impress as U.S. Junk Bond ETFs See Redemptions

Global Funds Impress as U.S. Junk Bond ETFs See Redemptions

Shares of the SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK), the second-largest high-yield bond ETF by assets, are higher by half a percent today despite rising short interest in the fund. The volume of borrowed shares in JNK jumped to 22.8 million on Friday, about three times the average during the past year and up from 9.75 million shares a month ago, Bloomberg reported, citing Markit Group data.

Consider that factoid about JNK, which has $11.6 billion in assets under management, the latest ding on U.S.-focused junk bond ETFs. Until recently, the asset class has thrived as investors have sought new avenues for yield in today's low interest rate environment.

Last week, it was reported that JNK's primary rival, the larger iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG), saw outflows of almost $219 million on Tuesday. The five largest junk bond ETFs have seen outflows totaling $1.97 billion since September, Bloomberg reported.

Skewering HYG, JNK and rival U.S.-focused high-yield bond ETFs for asset losses obfuscates a critical fact. That being international junk bond ETFs have been quite proficient in gathering assets this year. That fact is made all the more impressive when considering that all of the major ETFs exclusively devoted to global high-yield debt did not even exist until this year.

Take the example of the Market Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM). HYEM, which debuted in early May, focuses on a burgeoning segment of the bond market. Dollar-denominated emerging markets bonds represented $84 billion of the EM bond universe in 2003, but that number jumped to $541 billion last year according to data from Bank of America Merrill Lynch and J.P. Morgan.

To this point, HYEM has gathered $20.7 million in assets under management. Not jaw-dropping, but a decent start for a new ETF with a niche focus. A 30-day SEC yield of 6.72 percent and the growth of the high-yield market in developing nations could be catalysts for future inflows to HYEM.

While $20.7 million may not sound impressive, the $180.3 million raked in by the Market Vectors International High Yield Bond ETF (NYSE: IHY) is. That fund debuted in early April and is a developed market equivalent to HYEM. France, the U.K., Germany and Canada combine for about 35 percent of IHY's weight.

No matter how one slices things, $180.3 million in inflows is stellar for an ETF that is not even 10 months old. However, the success of IHY is rarely, if ever mentioned, in the mainstream financial press.

BlackRock's (NYSE: BLK) iShares unit, the world's largest ETF sponsor, has found its own success with global high-yield bond funds this year. The iShares Global High Yield Corporate Bond Fund (BATS: GHYG), which debuted in early April, has nearly $35.5 million in AUM. That is with U.S. issues accounting for nearly two-thirds of the fund's weight and with the ETF trading on the BATS Exchange, which is not nearly as well known as the New York Stock Exchange or Nasdaq.

The iShares Global ex USD High Yield Corporate Bond Fund (BATS: HYXU) is the iShares rival to IHY. To be sure, HYXU has not proven as popular to this point with $25.4 million in AUM. That might have something to do with the euro being the dominant currency in this ETF. Euro-denominated issues account for over 86 percent of HYXU's weight.

So GHYG and HYXU have almost $61 million in AUM combined and that may not be enough to catch critics' eyes. Perhaps the $176 million held by the iShares Emerging Markets High Yield Bond Fund (BATS: EMHY) is enough.

EMHY debuted in April and its success indicates investors are willing to take on some of level of risk with their international bond holdings. Sure, Turkey and the Philippines combine for over 26 percent of the fund's weight, but Venezuela is the second-largest country weight with an allocation north of 14 percent. This is an ETF where Ukraine, Hungary and Lebanon are more prominently displayed than Brazil, China and Russia.

Add up the flows to IHY and EMHY, the latter of which also trades on BATS, and the number is over $356 million. Over $180 million and $176 million, respectively, for two ETFs that debuted in April is an accomplishment in any environment, let alone that has been more risk off than risk on. Using these two funds as the measuring sticks, perhaps it is fair to argue that some of the money departing HYG and JNK is flowing to global junk bond ETFs.

Even if that is not the case, it is clear investors have some appetite for international high-yield bonds. It would seem only fair to mention that when highlighting outflows from HYG, JNK and other U.S.-focused junk bond ETFs, right?

For more on junk bond ETFs, click here.


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