High yield bond ETFs are like double edge swords: on the one hand, they provide high interest payments with possible capital appreciation in a low rate environment. On the other hand, they are volatile and subject to larger capital loss during market stress.
In the current low rate, stimulus driven, credit recovery (or so called deleveraging) environment, high yield bond funds are good substitutes to riskier equity funds. Credit wise, corporations are in general in better shape than consumers. It is thus worthwhile to consider high yield bond ETFs in one's retirement or income portfolios as long as a systematic portfolio strategy is in place.
We review the three high yield bond ETFs. The following table shows their performance:
U.S. High Yield Bonds 07/08/2011
| Description | Symbol | 1 Yr | 3 Yr | 5 Yr | Avg. Volume(K) | 1 Yr Sharpe |
|---|---|---|---|---|---|---|
| iShares iBoxx $ High Yield Corp | HYG | 13.21% | 8.9% | NA | 1,435 | 250.83% |
| SPDR Barclays Capital High Yield | JNK | 17.07% | 10.33% | NA | 3,141 | 257.04% |
| PowerShares Fundamental High Yield | PHB | 12.57% | 3.39% | NA | 268 | 258.64% |
JNK is clearly the leader among the three ETFs. Both JNK and HYG have impressive 3 year performance. PHB, however, is a laggard in 1 and 3 year performance.
For information on more ETF performance in different class of assets, please refer here.
JNK's gross expense ratio is 0.40% with the total net assets of $7.07 billion, this is compared with HYG's gross expense ratio of 0.5% and total net asssets of $8.54 billion.
JNK tracks Barclays Capital High Yield Index, which was once the famed Lehman Brothers' high yield index. HYG, on the other hand, tracks the iBoxx $ Liquid High Yield Index, a corporate bond market index compiled by the International Index Company Limited.
Recently, Invesco PowerShares PHB changed its underlying index. It is now tracking the RAFI High-Yield Bond Index (so called fundamental index). It has 0.5% expense ratio. We will see how this index will perform in the future.
The following table shows the top holdings for JNK and HYG respectively. From the table, one can see HYG is a bit tilted to financial companies' bonds.
JNK top holdings (as of 7/8/2011):
Name | Weight | Market Value | |
CIT GROUP INC 7 05/01/2017 | 2.65% | 189,831,075.00 | |
LYONDELL CHEMICAL COMPAN 11 05/01/2018 | 1.85% | 132,367,710.12 | |
FIRST DATA CORPORATION 12.625 01/15/2021 | 1.61% | 115,358,662.40 | |
CAESARS ENTERTAINMENT OP 10 12/15/2018 | 1.48% | 105,946,224.17 | |
INTELSAT LUXEMBOURG SA 11.25 02/04/2017 | 1.25% | 89,690,835.94 | |
WIND ACQUISITION FIN SA 11.75 07/15/2017 | 1.13% | 81,070,242.36 | |
ENERGY FUTURE/EFIH FINAN 10 12/01/2020 | 1.09% | 77,871,122.08 | |
CLEAR CHANNEL WORLDWIDE 9.25 12/15/2017 | 1.06% | 75,964,570.75 | |
ALLY FINANCIAL INC 8 11/01/2031 | 1.06% | 75,684,888.89 | |
CCH II LLC/CCH II CAPITA 13.5 11/30/2016 | 1.05% | 75,492,500.63 |
HYG top holdings (as of 7/8/2011):
Holding | % of Fund | Coupon | Maturity | Moody's/S&P Rating | |
BLACKROCK CASH FUNDS | 1.50% | 0.01 | TSY /TSY | ||
CIT GROUP INC | 1.21% | 7.00 | 5/1/2017 | B2 /B+ | |
LYONDELL CHEMICAL CO | 0.87% | 11.00 | 5/1/2018 | Ba3 /BB- | |
CIT GROUP INC | 0.86% | 7.00 | 5/1/2016 | B2 /B+ | |
HCA INC | 0.80% | 9.25 | 11/15/2016 | B2 /BB- | |
INTELSAT BERMUDA LTD | 0.75% | 11.25 | 2/4/2017 | Caa3 /CCC+ | |
FIRST DATA CORP | 0.75% | 12.62 | 1/15/2021 | Caa1 /B- | |
TEXAS COMPETITIVE EL | 0.73% | 11.50 | 10/1/2020 | B2 /CCC | |
CHS / CMNTY HEALTH S | 0.72% | 8.88 | 7/15/2015 | B3 /B | |
SPRINGLEAF FINANCE C | 0.69% | 6.90 | 12/15/2017 | B3 /B |
High yield bond ETFs also exhibit well known momentum behavior. We will have an article on this in future in more detail. Interested readers can look here for a portfolio that utilizes high yield bond alpha. This portfolio has the following performance, compared with HYG. Click to enlarge:
In conclusion, investing in high yield bond ETFs can be rewarding. Investors, however, need to adopt a systematic way to manage their high volatility.
Disclosure: I am long JNK.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
