As investors search for yield in a zero-interest rate environment, high-yield corporate debt is a space that seems to be garnering more and more attention. In my articles "HYG: Peek Inside This High-Yield ETF" and "JNK: A Look Inside This ETF's Trunk," I attempt to consolidate some of the more important pieces of information on the funds, including some not easily found on each fund's webpage, in an attempt to provide investors with a concise resource for information on HYG and JNK.
I now turn my attention to a third, less heavily traded high yield corporate bond ETF, the PowerShares Fundamental High Yield Corporate Bond Portfolio, also known by its ticker symbol, (PHB).
With an inception date of November 15, 2007, PHB has been around for slightly more than four years. It recently traded at $18.52, has average volume over the past 90-days of approximately 364,000 shares per day, and has an SEC 30-day yield of 5.31%. Since August 2, 2010, the PHB attempts to track the performance of the RAFI High Yield Bond Index. Prior to that date, the PHB was officially called the PowerShares High Yield Corporate Bond Portfolio, and its underlying index was the Wells Fargo High Yield Bond Index. Given the change in the index it tracks, combined with the short time period the fund has been in existence, it seems more appropriate to direct readers to PowerShares' website to learn how this fund performed relative to the index it tracks or relative to other popular high yield bond indices.
In terms of the PHB's performance since inception, it is quite unimpressive. However, that is largely a function of the unfortunate timing of when the fund began trading, which was not long before the markets fell apart during the financial crisis. Instead of focusing on these past results, I'd like to turn our attention to more current pieces of information -- information that will have an effect on future returns. Let's move on to an examination of the fund's holdings.
In terms of years to maturity, 30.928% of the fund's assets mature between one and five years from now. More than two-thirds of the fund's assets, 67.649% to be exact, mature between five and ten years from now. The remaining assets, representing three CUSIPs (identifier for a bond, similar to an equity symbol for a stock) have maturity dates on November 1, 2012 (two CUSIPs) and January 15, 2013. Currently, there are no holdings with maturities beyond November 1, 2021. That particular corporate note belongs to Navistar International (NAV) and represents 0.781% of the fund's assets. For those who are curious about the breakdown of the CUSIPs and percentage of assets maturing in each calendar year, I created the following table to show this data:
Maturities by Year
# of CUSIPs
% of Assets
When looking at the sector allocation of this high yield corporate bond ETF, PowerShares breaks down the holdings into twelve different categories. The largest sector weighting in the PHB is Consumer Cyclical at 18.92%, followed by Consumer Non-Cyclical at 15.20%, and Energy at 15.09%. Together, these three sectors make up nearly half of the fund's assets at 49.21%. The next three largest sectors are Financials at 12.65%, Communications at 9.84%, and Basic Materials at 9.00%. The PHB also has exposure to Industrials, Utilities, Technology, and Health Care. Last, there are two categories labeled Unclassified (6.44% of assets) and Diversified (0.30% of assets).
Now that we have an idea of the maturity profile and sector allocation of the fund, let's take a look at credit quality, as measured by Moody's and S&P. Unlike its counterpart, HYG, the PHB's webpage only provides a high-level summary of the fund's assets by credit rating. For more details, an investor is left to dig through the holdings and find this information for him or herself.
When glancing through the ratings of the fund's 215 different CUSIPs, I immediately noticed one glaring difference between this ETF and the other two popular high yield corporate bond ETFs, HYG and JNK. PHB does not have any C-rated paper. Furthermore, 18 of the CUSIPs actually have BBB- ratings from S&P, which is an investment grade rating, and eleven CUSIPs have Baa3 ratings from Moody's, which is also an investment grade rating. Perhaps a bit surprising, only one of the 18 BBB- ratings corresponds to one of the eleven Baa3 ratings. This means there are actually 28 CUSIPs, representing 13.02% of the fund, that have an investment grade rating from either Moody's or S&P.
Thirty-nine CUSIPs have a Ba1 rating by Moody's (the highest non-investment grade rating), and 42 have a BB+ rating by S&P (the highest non-investment grade rating). When combining this information with the investment grade ratings mentioned above, we discover that Moody's rates 23.26% of the PHB's holdings as either investment grade or one notch away, and S&P rates 27.90% of the holdings as either investment grade or one notch away. At the other end of the spectrum, S&P rates 16 of the CUSIPs at B- (one notch above a C rating), and Moody's has 30 with a B3 rating (one notch above a C rating). Of the B3 or B- rated CUSIPs, the two major rating agencies are in agreement on 10 of them, representing 4.65% of the fund's holdings.
Let's now turn our attention to more company-specific information. When I was digging through PHB's holdings, I was particularly interested to learn whether there is a significant concentration of CUSIPs to any one company. As of January 24, 2012, there are 215 different CUSIPs in PHB's portfolio across 180 different companies. From these two pieces of information, we can immediately tell there is, in general, strong diversification among the CUSIPs. However, just to make sure a couple companies didn't dominate with several CUSIPs, I looked through the holdings one-by-one and found just one company, Ford Motor Credit (F), with more than two CUSIPs. Ford's three CUSIPs together make up 3.395% of the fund's assets, and individually rank as the sixth, seventh, and ninth largest holdings in the PHB.
The highest weighted holding in the PHB belongs to Weyerhaeuser's (WY) October 1, 2019 maturing, Ba1/BBB- rated, 7.375% coupon bond, with a 1.419% weighting. In total, nine CUSIPs have weightings greater than 1% in the PHB, while the lowest weighting in the fund's portfolio is as little as 0.099%.
Finally, I was interested in finding out how many of the fund's CUSIPs are trading under par. However, PowerShares does not provide this information. Therefore, using FINRA's Trade Reporting and Compliance Engine (TRACE), I looked up the price at which each of the 215 CUSIPs last traded during the three and four o'clock EST hours on the afternoon of January 25, 2012. Of the 215 different CUSIPs in the PHB, only 25 (11.63% of all holdings) had market prices under par (100 cents on the dollar). Of the 25 CUSIPs trading under par, only 6 were trading under 90 cents on the dollar.
Of the 190 CUSIPs trading at par or higher, 70 (32.56% of all holdings) were priced at 110 or higher, and 4 were even above 120 cents on the dollar. The lowest price on the list belonged to a MEMC Electronic Materials (WFR) note, maturing April 1, 2019, rated B1/BB by Moody's and S&P respectively, and priced at 81.20 cents on the dollar. It comprises 0.382% of the fund's assets. The highest price in the PHB belonged to a Lennar Corp. (LEN) note, maturing June 1, 2017, rated B3/B+ by Moody's and S&P respectively, and priced at 126 cents on the dollar. This particular CUSIP comprises 0.274% of the PHB.
On a closing note, given that many high yield corporate bond funds (PHB, HYG, JNK, as well as other funds) invest in similar corporations and CUSIPs, I hope you will find the granular nature of some of the information provided in this article useful as you think about your non-investment grade corporate bond exposure in general.
Disclosure: I am long a WY bond, although not the CUSIP mentioned in this article.