High Yield ETFs: Lehman vs. iShares

Head to Head: High Yield ETFs

Lehman High Yield Bond ETF (JNK) vs. iShares iBoxx High Yield Corporate Fund (HYG)

With the rapidly growing ETF product list, we thought it appropriate to differentiate like-products. Our attempt is to analyze funds among popular categories and compare their strengths and weaknesses against each other.

Basics

Expenses: JNK is 40 bps vs. HYG’s 50 bps. 10 bps in a fairly inefficient asset class is irrelevant in our view. More can be saved through premium/discount “awareness”. It’s a tie.

Volume: Trading volume is fairly close. JNK trades approximately 1M shares per day vs. almost 800K shares for HYG. However, since JNK has a much lower price, HYG trades significantly more dollar value. Regardless, both funds offer plenty of liquidity for most investors, although the edge goes to HYG.

Dividend and Yield: Since these are pass-thru vehicles, the yield of the funds are that of its components. JNK’s yield as of June 26^th is 14.11%, while HYG 10.94%. Even being mindful that “more money has been lost chasing yield than at the point of a gun” and the fact that JNK’s holdings are slightly longer in maturity and on average lower credit quality, we cannot over look JNK’s yield advantage. Winner is JNK.

Holdings

Diversification: JNK has the edge on company diversification with 152 issues vs. HYG’s 52 issues. Both funds have approximately 23% of their holdings in their top ten holdings. Although the industry diversification off the cusp would go to HYG simply because it has a more detailed industry breakdown available on its factsheet, from a bit more detailed look, both funds seem similar. Edge goes to JNK for having more issues in the fund. Winner is JNK.

Quality: Corresponding to its ticker, JNK has lower credit quality, an average of B2 whereas HYG has B1 average credit quality. Both funds have an average coupon of around 8.80% however; JNK has an average maturity of 7.2 years vs. HYG’s 6.5 years. Both have similar durations of around 4.5 years, JNK at 4.8 years and HYG at 4.5 years. Win goes to HYG.

Conclusion

JNK wins in the aggregate; tracking an index is that is more diversified and its greater yield more than makes up for a slightly longer and lesser credit quality characteristics. In addition, if you are buying a High Yield ETF because you believe in the spread compression story, JNK’s larger modified duration should help the fund outperform HYG as spreads tighten.

It is important to note the unspecified data referenced is as of March 31, 2009.

Disclosure: The author does not hold positions in either of these funds.

Comments

[Ian in Chicago:]

Some other salient differences between JNK v. HYG:

- JNK's index is a market-weighted index and HYG's is issuer-weighted which partly explains the diversification/alloca... difference between the two funds
- JNK's annual turnover rate is 19% and HYG's is 27% (according to Yahoo! Finance)

Jun 29 06:43 PM