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Junk Bond ETFs on a Tear: Here's Why

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Most of the central banks in the developed economies have adopted a dovish stance from the beginning of 2020 owing to the coronavirus spread. The Fed has signaled no further rate hikes as long as the economy needs it.

Naturally, assurances of a few more months of cheap money inflows provided a boost to the global equity markets. Bond ETFs, especially the high-yield ones, also held their ground thanks to the prevailing low interest rates. Investors flocked to this area to in the pursuit of higher current income.

Per a CNBC article, junk bonds aren’t so worthless anymore, as corporate earnings have been improving.A strong fundamental backdrop is helping to underpin what traditionally has been one of the riskiest sections of the financial markets.The second-quarter earnings season has hit the market with sky-high stock prices and extremely upbeat expectations.

Estimates for second-quarter earnings have risen steadily for the past six months (per a CNBC article), from the expected 45% growth in January to 65% growth currently compared with the same period last year. It’s the strongest rate of growth since 2009 after the horrible spell of the Great Recession.

Yields in the $10.6 trillion junk bond space for the lowest-grade bonds in terms of quality are hovering around the historic lows after the peak of covid-19 in 2020. The CNBC article noted that the balance sheets of the high-yield providing companies are looking considerably strong.

In March 2020, during the worst of the pandemic volatility, the yield was at 9.2%, while it slumped to 4% (per ICE BofA U.S. high yield index effective yield) in Jun 2021. This is the first time in history that the collective yield for junk has fallen below the rate of inflation as measured by the consumer price index, which rose 5.4% year over year in June.

“Corporations weathered the storm last year and have positioned themselves really well,” said Collin Martin, fixed income strategist at Charles Schwab, as quoted on CNBC. “Couple that with yield-starved investors going into anything and everything that offer better than a 0% yield, and it’s really the perfect storm to see spreads drop to those pre-financial crisis levels.”

Companies have built enormous cash positions over the past several years, with total liquid assets at nonfinancial companies totaling $6.4 trillion through the first quarter of 2021, according to the Federal Reserve. That’s up nearly 50% since 2018, the CNBC article noted. Rock-bottom interest rates helped the companies to build such a huge cash base.

ETFs in Focus

Against this backdrop, below we highlight a few high-yield bond ETF winners of the year (see all High-Yield/Junk Bond ETFs here). These ETFs offer extra-ordinary yield compared with the benchmark U.S. treasury yield which currently stands at 1.37% as of Jul 14, 2021.

High Yield ETF  – Up 5.48%; Yield 7.08%

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL - Free Report) – Up 5.25%; Yield 4.33%

FlexShares High Yield Value-Scored US Bond Index Fund (HYGV - Free Report) – Up 4.71%; Yield 5.95%

PGIM Active High Yield Bond ETF (PHYL - Free Report) – Up 4.62%; Yield 6.90%

Virtus Newfleet High Yield Bond ETF  – Up 4.49%; Yield 4.19%

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