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Junk bond ETFs have been suffering lately. This is because junk-rated companies withdrew their bond sales and credit spreads widen.
What’s Driving the ETFs?
On Nov 10, coal producer, Canyon Consolidated Resources, pulled a proposed bond sale as a result of the growing uncertainty clouding the credit markets. Moreover, just a day before this, NRG Energy pulled its junk bond due to widening spreads in the asset class.
Uncertainty is mounting on the timely passing of the U.S. tax reform. After the Democrats emerging victorious in Virginia and New Jersey, house speaker Paul Ryan stated that there is now an increased pressure on his party to pass the promised reforms. However, he indicated that, if required, the tax reform will be delayed, owing to Congressional Budget Office’s forecast cost of $1.7 trillion over a decade. Per Washington Post reports, Senate Republican leaders are weighing the impact of a one-year delay in reforms.
Markets believe that uncertainty over the tax reform has increased the appeal of curve-flattening trades. Moreover, increasing uncertainty over whether the government will introduce bonds having a maturity of more than 30 years also contributed to the growing appeal of such trades. This has in turn weighed on the high-yield space.
Huge cash outflows in the junk bond space have also been driving these ETFs lower. Per a Reuters article citing Lipper data, investors withdrew $621.9 million from the high-yield space last week and $1.2 billion in the prior week.
Moreover, markets anticipate an interest rate hike in the December meeting of the Fed. Per the CME Fed Watch tool, markets price in a 96.7% chance of a rate hike in December. This might lead to a further flattening of the yield curve.
iShares iBoxx High Yield Corporate Bond ETF (HYG - Free Report)
This fund has AUM of $18.5 billion and seeks to provide exposure to high-yield bonds. It charges 49 basis points as fees per year and holds 1034 junk bonds in its portfolio. From a sector look, Communications, Energy and Consumer Non-Cyclical are the top three allocations of this fund, with 24.4%, 13.6% and 13.4% exposure, respectively (as of Nov 10, 2017). The fund targets the short to intermediate end of the yield curve as it has a weighted average maturity of 4.27 years and an effective duration of 3.67 years. The fund has returned 0.7% year to date and 4.4% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
SPDR Bloomberg Barclays High Yield Bond ETF (JNK - Free Report)
This fund has AUM of $12.5 billion and seeks to provide exposure to high-yield bonds. It charges 40 basis points as fees per year and holds 896 junk bonds in its portfolio. From a sector look, Industrial, Finance and Utility are the top three allocations of this fund, with 87.4%, 9.4% and 3.0% exposure, respectively (as of Nov 9, 2017). The fund targets the short-to-intermediate end of the yield curve as it has an average maturity of 6.25 years and option adjusted duration of 3.79 years. The fund has returned 0.6% year to date and 4.4% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #4 with a High risk outlook.
PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS - Free Report)
This fund has AUM of $1.6 billion and seeks to provide exposure to high-yield bonds. It charges 55 basis points as fees per year and holds 410 junk bonds in its portfolio. From a sector look, High Yield Credit, Investment Grade Credit and U.S. Government-Related are the top three allocations of this fund, with 95.3%, 3.6% and 3.2% exposure, respectively (as of Oct 31, 2017). The fund targets the short end of the yield curve as it has a weighted average maturity of 2.94 years and an effective duration of 1.89 years. The fund has returned 0.5% year to date and 4.1% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
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Junk Bond ETFs Plunge to Seven-Month Low
Junk bond ETFs have been suffering lately. This is because junk-rated companies withdrew their bond sales and credit spreads widen.
What’s Driving the ETFs?
On Nov 10, coal producer, Canyon Consolidated Resources, pulled a proposed bond sale as a result of the growing uncertainty clouding the credit markets. Moreover, just a day before this, NRG Energy pulled its junk bond due to widening spreads in the asset class.
Uncertainty is mounting on the timely passing of the U.S. tax reform. After the Democrats emerging victorious in Virginia and New Jersey, house speaker Paul Ryan stated that there is now an increased pressure on his party to pass the promised reforms. However, he indicated that, if required, the tax reform will be delayed, owing to Congressional Budget Office’s forecast cost of $1.7 trillion over a decade. Per Washington Post reports, Senate Republican leaders are weighing the impact of a one-year delay in reforms.
Markets believe that uncertainty over the tax reform has increased the appeal of curve-flattening trades. Moreover, increasing uncertainty over whether the government will introduce bonds having a maturity of more than 30 years also contributed to the growing appeal of such trades. This has in turn weighed on the high-yield space.
Huge cash outflows in the junk bond space have also been driving these ETFs lower. Per a Reuters article citing Lipper data, investors withdrew $621.9 million from the high-yield space last week and $1.2 billion in the prior week.
Moreover, markets anticipate an interest rate hike in the December meeting of the Fed. Per the CME Fed Watch tool, markets price in a 96.7% chance of a rate hike in December. This might lead to a further flattening of the yield curve.
Below we discuss a few ETFs that seek to provide exposure to the high-yield space (see all High-Yield/Junk Bond ETFs here).
iShares iBoxx High Yield Corporate Bond ETF (HYG - Free Report)
This fund has AUM of $18.5 billion and seeks to provide exposure to high-yield bonds. It charges 49 basis points as fees per year and holds 1034 junk bonds in its portfolio. From a sector look, Communications, Energy and Consumer Non-Cyclical are the top three allocations of this fund, with 24.4%, 13.6% and 13.4% exposure, respectively (as of Nov 10, 2017). The fund targets the short to intermediate end of the yield curve as it has a weighted average maturity of 4.27 years and an effective duration of 3.67 years. The fund has returned 0.7% year to date and 4.4% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
SPDR Bloomberg Barclays High Yield Bond ETF (JNK - Free Report)
This fund has AUM of $12.5 billion and seeks to provide exposure to high-yield bonds. It charges 40 basis points as fees per year and holds 896 junk bonds in its portfolio. From a sector look, Industrial, Finance and Utility are the top three allocations of this fund, with 87.4%, 9.4% and 3.0% exposure, respectively (as of Nov 9, 2017). The fund targets the short-to-intermediate end of the yield curve as it has an average maturity of 6.25 years and option adjusted duration of 3.79 years. The fund has returned 0.6% year to date and 4.4% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #4 with a High risk outlook.
PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS - Free Report)
This fund has AUM of $1.6 billion and seeks to provide exposure to high-yield bonds. It charges 55 basis points as fees per year and holds 410 junk bonds in its portfolio. From a sector look, High Yield Credit, Investment Grade Credit and U.S. Government-Related are the top three allocations of this fund, with 95.3%, 3.6% and 3.2% exposure, respectively (as of Oct 31, 2017). The fund targets the short end of the yield curve as it has a weighted average maturity of 2.94 years and an effective duration of 1.89 years. The fund has returned 0.5% year to date and 4.1% in a year (as of Nov 10, 2017). It has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>