Why Junk Bond ETFs Are Gaining Popularity

Apparently, intrepid investors are developing a growing appetite for riskier investments such as junk bond ETFs. After a volatile and scary year, you can’t help but wonder what’s happening.

The yield margins of high-yield bonds over Treasuries are narrowing, as seen on the Merrill Lynch U.S. High Yield Master II index, which shrunk from more than 2.1% in February to 1.2% last Thursday, reports Tom Sullivan for Barron’s.

Demand for these junk bonds have been on the rise and the best performers were in health care and utilities. It is thought that the reason for the rally is that traditional high-yield investors never left the market but stuck it through the toughest of times.

Investors have looked to the riskier single-B securities from the double-B-rated issues. Time will tell if people will be interested in the even more riskier triple-C-rated bonds.

• State Street’s SPDR Lehman High Yield Bond (JNK): up 12.2% year-to-date; 13.6% yield
• iShares iBOXX $High Yield Corporate Bond (HYG): up 5.7% year-to-date; 11% yield
• PowerShares High Yield Corporate Bond (PHB): up 5.4% year-to-date; 11.5% yield

In other bond news:

In California, there is a budget gap of $21.3 billion. The state will cut $5.5 billion soon and a further fill the $26 billion hole over the next two years. The California general-obligation bonds were hovering around 1.5% last Friday.

• iShares S&P California Muni Bond Fund (CMF): up 4.3% year-to-date; 3.6% yield

The Treasury’s two-year note dropped to 0.85% last Friday. The 10-year yield closed at 3.43%. A major concern was over the outlook of a weaker dollar and the potential change in country’s debt rating by the S&P.

• iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY): down 0.3% year-to-date; 3.3% yield
• iShares Lehman 7-10 Year Treasury Bond Fund ETF (IEF): down 7.7% year-to-date; 3.9% yield

Max Chen contributed to this article.

Comments

[sacking:]

Thanks for your comments. I'm using HYG and BND as the bond part of an ETF portfolio that's 70% stock and 30% bonds.

May 31 11:04 AM

[American in...:]

I am a little surprised that interest in building as opposed to October and November of last year when these funds were yielding 17%. I bought JNK last automn.

Investors need to show more courage. The people buying don't have the courage to be superior investors.

Yes, last automn was scary. But junk bond losses in a well diversified ETF are quite manageable.

May 31 11:24 AM

[Mad Hedge F...:]

Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT’s, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF’s for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB, and the iShares iBoxx Fund (HYG). See www.madhedgefundtrader... for the full logic.

May 31 12:20 PM

[prairiedog555:]

check out the floating rate CEF's, they seem to do well in a rising interest rate enviornment because they are adjustable rate.

Jun 01 11:55 AM

[RiskReturnO...:]

For those who have following my strategy of long HYG, JNK, hedged with small dose of SDS (short SPY), the performance has been very steady for the past few months. The SDS hedge can be from 10-30% of the value of HYG and JNK, and it provides you a great peace of mind (and reduced portfolio volalitity).

If the economy continued to recover, the BBB bond yield will continue to head down and your HYG and JNK shares will appreciate.

If the economy experiences a double-dip, the SDS will protect your portfolio from a big stock market sell-off.

Jun 02 02:25 PM