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ETF News And Commentary

Eric Dutram

Are Investors Taking Another Look At Junk Bond ETFs?

JNK HYG

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While the economy has slowly begun to improve, many segments still remain weak, suggesting that we might not be out of the woods yet. Thanks to this, Ben Bernanke and the rest of the Fed have decided to keep rates at their ultra-low levels for the foreseeable future, promising not to raise rates until 2014 at the earliest. This proclamation has had huge effects on the economy and investors’ decisions going forward as well. It has pushed many out of some types of fixed income while it has also limited the appeal of ultra-safe investment vehicles such as CDs or savings accounts.

Yet, beyond pushing investors into broad equities, this has also seemingly reignited the passion that some have for high yielding securities as a way to supplement income. The focus in this space has undoubtedly been on high yielding equities as investors have piled into REITs, MLPs, and other sectors that have traditionally been known for their impressive payouts. Some also assumed that this trend might extend to the bond world with investors focusing in on high yield bond ETFs in order to boost payouts from the fixed income space but has this really been the case? (read Three Bond ETFs For A Fixed Income Bear Market)

After all there has been a great deal of talk about investors moving beyond Treasury bonds and into higher risk securities. Default rates still remain low when compared to historical levels for junk-rated securities while yields in this sector still offer a significant premium over more highly rated Treasury bonds. Furthermore, junk bonds tend to be more short-duration focused suggesting that when rates eventually do rise, these securities are likely to be less impacted then their peers (read Do You Need A Floating Rate Bond ETF?).

Partially thanks to these factors, it appears that yes, investors who are looking to increase yield in the bond world are taking a closer look at junk bond ETFs for their exposure. This is best evidenced by the significant inflows that two products in the space—HYG and JNK—have seen in recent time periods. According to data from XTF.com, the segment, as represented by these two funds, have been in the top five for inflows for both the past one week and year-to-date periods, outpacing all other bond products. In fact, the inflows into these two funds have accounted for nearly 15% of all the aggregate inflows in the ETF world so far this year, further demonstrating how much investors are clamoring for these bond ETFs in their portfolios (see Three Outperforming Active ETFs).

Clearly, while dividend paying equities are growing increasingly popular, junk bond ETFs are too. The segment is attracting considerable inflows and could continue to do so if the Fed keeps rates steady at their current, ultra-low level. As a result, it could be time to take a closer look at the increasingly popular space as more inflows will only allow the securities to go up further in price, especially if current policies continue. For investors intrigued by this trend, we have briefly highlighted some of the key points from these increasingly popular and liquid ETFs below:

iShares iBoxx $ High Yield Corporate Bond ETF (HYG - ETF report)

This junk bond ETF has added close to $2.7 billion in assets so far this year, including $350 million in the past week alone, giving the fund just under $13.7 billion in AUM. The product holds 483 securities in total and charges investors 50 basis points a year in fees for its services. Consumer staples, industrials and telecom bonds make up the top three sectors while the focus from a duration perspective is decidedly on the short end; the effective duration is just 4.22 years. Overall, the product could serve as a nice yield booster too, as the fund has a 30-Day SEC Yield of 6.7%, well above similar duration products in the Treasury space (read Top Three High Yield Junk Bond ETFs).

SPDR Barclays High Yield Bond ETF (JNK - ETF report)

This SPDR fund has also seen significant inflows this year, racking up $2.3 billion since the start of 2012 including more than half a billion in the past week alone. This gives the product just over $11.5 billion in assets, ensuring that much like HYG, this fund has very tight bid ask spreads. Overall, the fund includes 224 securities while charging investors 40 basis points a year in fees for its services. Top holdings include HCA Inc bonds maturing in 2020, notes from Sprint due in 2018, and bonds from First Data that mature in 2021. Despite these longer term bonds in the top holdings, this fund has a slightly higher duration although it too comes in below 4.5 years. Nevertheless, the fund also had a solid yield at 6.7% in 30-Day SEC Yield terms, making it another great option for those looking for higher payouts in the bond space.

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