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The high-yield junk bond market was a troubled zone in 2015 due to the dual threats of the oil price collapse and the Fed lift-off. As a result, the high-yield or junk bond ETF space was deep in the red. Even the investment-grade corporate bond ETFs gave muted performances last year thanks to the rising rate worries, but the decline was lesser than the junk bond ETFs.

The fact that the U.S. energy companies are closely tied to the high-yield bond market, with the former making up about 15% of junk bond issuance, has been blamed for the massacre, as per CNBC. Thus, fears of their default amid the oil price rout triggered the junk bonds’ sell-off last year (read: Junk Bond ETFs--Unfortunate Victims of the Oil Crash?).
Who is the Winner So Far This Year?
However, things started to change at the start of 2016. Hard landing fears in China, crash in global financial markets and no meaningful recovery in the Japanese and European economies brightened the bid for safety this year. As investors flocked to U.S. treasuries, the yield on the benchmark 10-year Treasury bonds has remained under 2% since February.
This in turn sharpened the drive for high income and brought junk bond ETFs back into the business as investors downplayed the default issues associated with junk bond ETFs. Added to this, the recent rebound in oil prices and the resultant risk-on sentiments in the market triggered investor interest in the junk bond ETFs space. Plus, cheaper valuation after two subdued years made the area relatively well-positioned to bet on.
Investors poured more than $1.16 billion and $1.13 billion respectively in SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx $ High Yield Corporate Bond (HYG) in the five days ending March 3, 2016. Investment-grade corporate bond ETFs, however, fell slightly below junk-bond ETFs since the former offer lesser yields. The outperformance in the latter was more palpable in the last one month frame (as of March 8, 2016) (read: Weekly ETF Asset Round-Up: Equity Tops, Bonds Lag).
Investment-Grade Leaders
In the last one month, top performances were put up by Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report) , Credit-Scored U.S. Long Corporate Bond (LKOR) and Investment Grade Interest Rate Hedged ETF (IGHG). While VCLT and LKOR added 2.8% each, IGHG advanced 2.4%.
Junk-Bond Winners
On the other hand, junk bond ETFs clearly surpassed the investment-grade bond ETFs in the last one-month frame. Below we highlight three such ETFs.
High Yield Interest Rate Hedged ETF (HYHG) – up 9.9%
HYHG is an ETF which has an interest rate hedge built into its strategy as it takes a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield of about 6.40% (and a modest expense ratio of just 50 basis points) indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. The fund is up 0.9% so far this year (read: 4 Hedged & Inverse ETFs to Ride Out Imminent Rate Hike).
Market Vectors Fallen Angel ETF (ANGL) – up 7.8%
This innovative fund uses the sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index and focuses on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from grace and are now trading as junk bonds. The fund yields 5.28% annually while charges just 30 bps in fees. The fund was a top performer even in the year-to-date frame having scooped up 4.3% gains.
JNK – up 6.8%
This fund includes publicly issued U.S. dollar denominated, non-investment grade corporate bonds. The corporate sectors are Industrial, Utility and Financial Institutions. The fund has scratched up 0.4% gains this year and yields 6.62% in dividend.
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