SJNK Is Up 5.00% YTD And Yields Over 6.50% But What Are The Risks?

| About: SPDR Barclays (SJNK)

Summary

SJNK provides an attractive yield with short term exposure. Is it the place to park assets for monthly cash flow?

With over $2.7BLN in assets, will institutions still invest if rates continue upwards?

What is the exposure if the yield curve inverts or the stock market heads south ? We answer these questions and provide our recommendation of this attractive short term ETF.

SPDR Barclays Capital Short Term High Yield Bond ETF, SJNK, is a young, (inception 03/14/12) ETF with significant institutional assets and the asset leader of short term high yield ETFs. It is also the fourth largest high yield ETF after HYG, JNK, and BKLN. Thanks to stable short term rates and relatively stable equity markets since the beginning of the year, it has performed quite well. We analyzed the ETF, its underlying index, its sectors, top components and credit ratings and determined whether it is a stable place as an alternative to other fixed income or dividend paying investments for the balance of 2016 and beyond.

According to the sponsor, Barclays

The SPDR Barclays Short Term High Yield Bond ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays US High Yield 350M Cash Pay 0-5 YR 2% Index.

The index, with the symbol, {BHY5TRUU} includes only U.S. dollar denominated high yield corporate bonds with maturities up to 5 years. The 350M relates to the minimum size of the issuance and 2% is the maximum permitted amount of any one issue. Non-corporate bonds, structured notes, structures notes with embedded swaps, convertibles, Eurobonds, floating rate issues, zero coupon bonds and PIK,(Pay In Kind) are excluded from the index. The fund has some flexibility and does have zero coupon bonds at this time.

The non-diversified fund has 708, (including one US Treasury note) holdings plus cash, (as of May 12) while the index has 687, according to the fund sponsor. In terms of the sector and industries, this ETF is quite different than our recent reviews. Due to the fact the ETF is based upon credit quality, it is simply partitioned into three main areas: Industrials at 81.99%, Finance: 14.76%, Utility: 2.45%, Cash and Treasuries at .50% and .29%, respectively. The index is simply Industrial: 83.30%, Corporate: 14.45% and Utility: 2.25%. These weightings are quite fluid and it is a noteworthy factor of this ETF. We will discuss this fact again shortly.

Though the ETF is based in US dollars and has no currency exposure there is some foreign country and region exposure. It is not large but is noteworthy. Due to the fact that the exposure on an individual country basis is minimal we decided to simply analyze by regions.

SJNK Regional exposure

Region Weight
North America 77.72%
Europe 16.67%
Asia 5.29%
Latin America 0.32%
Click to enlarge

It should be noted that Canada is 3.51% of the North America holdings, and the UK is 5.92% of the Europe weighting. There is only limited concern at this time due to the possible "BREXIT" but we don't feel this will alter any credit issues in the foreseeable future. In terms of China, there is no direct exposure, but .26% in Hong Kong. Overall, we do not see credit conditions deteriorating further in the EU and as such, do not have any concerns in terms of geographic focus.

Though the fund is considered "short" term it does have a structure that can be delineated.

SJNK Maturity,(as of May 10)

Tenor Weight
Intermediate Term 57.71%
Short Term 39.35%
Long Term 0.18%
ETF Cash Component 2.76%
Click to enlarge

These breakdowns are courtesy of Fidelity.com. A far easier breakdown is provided by Morningstar with 1 to 3 years at 36.21%, 60.96%, 3 to 5 years, and 2.83% total (our calculation) from 5 years onward. The fund sponsor states 0-3 years is 40.67%, 3-5 years is 56.43% and 5 years onward is 2.89%. In any event the fund sponsor states that the average maturity is 3.23 years at this time. What is certain is that these figures fluctuate due to the sheer size of the ETF and its large number of holdings. Though the fund and index are rebalanced on a monthly basis, these weightings change on a daily basis and are definitely not fixed or certain for any period of time.

In terms of the all-important credit analysis, the fund sponsor uses the "Middle Rating" of Moody's, S&P and Fitch to determine a Security's credit classification of the holdings. Presently the ratings are as follows:

SJNK Credit ratings

Fund Rating Weight
BBB or Higher 1.30%
BB 46.70%
B 33.00%
CCC or Lower 18.61%
Not Rated 0.22%
Click to enlarge

While the credit structure here is only slightly useful, it is informative. With less than 19.00% in CCC or lower, it does indicate that the larger majority of the ETF are in the upper level of high yield paper. One aspect to consider is that investors may start chasing yields again and begin to go down the credit ladder in search of higher returns. Goldman's Bridget Bartlett recently stated that funds are "playing a catch-up to their various benchmarks and bond managers are more incentivized to step down the quality spectrum to find alpha." The takeaway is that with the underperformance of fund managers they will have no other choice but to buy the riskier, lower credit paper. This should propel SJNK much higher through the summer and balance of the year.

In order to properly ascertain the overall exposure of the top holdings, though limited due to fund size and 2% rule, we reviewed the top holdings, as usual. We reviewed and analyzed the top 15 holdings. Here are the top 15 holdings, their equity symbol, (if any), coupon and maturity, their ratings, (Moody's and S&P), Yield, their Duration/Modified Duration, and weight within the ETF.

SJNK top 15 holdings, as of May 10

Name/

Symbol

Coupon/

Maturity

Moody's/

S&P

YTM

Duration/

Mod Dur.

Weight

HCA Inc.

HCA

6.50%

02/15/20

Ba1/BBB- 3.64% 3.36/3.24 .703487%
Reynolds Group ISS

5.75%

10/15/20

c'10/15/16 @100

B1/B+ 3.907% .99/.40 .664871%

Tenet Healthcare Corp

THC

6.00%

10/01/20

Ba2/BB- 4.234% 3.63/3.82 .585934%

Navient Corp

NAVI

8.45%

06/15/18

Ba2/BB- 5.050% 1.90/1.81 .58481%

Wind Acquisition Fin SA

7.375%

04/23/21

Caa1/B 10.06% 4.22/4.17 .56751%

Sprint Communications

S

9.00%

11/15/18

B1/BB- 6.252% 1.88/2.22 .547186%

Softbank Group Corp

OTCPK:SFTBY

4.50%

04/15/20

Ba1/BB+ 4.59% 3.62/3.46 .541757%

Numericable SFR SA

OTCPK:NUMCF

4.875%

05/15/19

c'05/15/17

@ 101.83

B1/B+ 2.983% 0.99/0.97 .529902%

Dynegy Inc

DYN

6.75%

11/01/19

c'05/01/17

@ 103.38

B3/B+ 6.748% 2.77/3.03 .47826%

Sabine Pass LNG LP

SBR

7.50%

11/30/16

Ba2/BB+ 2.05% 0.98/0.51 .464795%

CHS/Community

Health Systems Inc

CYH

8.00%

11/15/19

c' 11/15/16 @102

B3/B- 8.424% 2.72/.47 .462928%

Arcelormittal

MT

10.85%

06/01/19

Ba2/BB 5.43% 2.59/2.46 .461174%
T Mobile USA Inc.

6.25%

04/01/21

Ba3/BB 5.28% 4.27/4.05 .448562%

Valeant Pharmaceuticals

VRX

6.375%

10/15/20

c'10/15/16 at 102

B3/B- 10.571% 3.56/3.65 .441601%

Navient Corp

NAVI

8.00%

03/25/20

Ba3/BB- 7.36% 3.37/3.14 .435422%
Click to enlarge

The top 15 represents only 7.9181% of the ETF. The current cash component of .8395% actually represents the largest portion of the fund at the present time. Including the cash component the total represents 8.7577%. The balance of the fund represents 91.2422%. As we mentioned, the weightings in this ETF change quite often and the fund, as mentioned, is rebalanced monthly. As one can notice, these short term yields are attractive and the durations, (expressed in years) are quite short as well. One of the reasons for this is that a fair amount of the issues may be called away later this year or mature. We will review the entire portfolio duration and average maturity shortly.

In terms of a credit breakdown of these top 15 there isn't too much information that is useful. Here is a brief summation of the credit weightings from the top 15: Moody's: Ba3: 1.4688%, Ba2: 1.5119%, Ba1: 1.2452%, B3: 1.3828%, B1: 1.742% and Caa1: 0.7035%. S&P is quite similar at BBB-: (investment grade) .703487%, BB+: 1.006552%, BB: 0.909736%, BB-: 2.153352%, B+: 1.673033%, B: 0.56751% and B-: 0.904529%. The only information we can glean here is that it is fairly balanced in terms of ratings of these top issues. Without analyzing the entire portfolio for specific ratings, our ETF ratings noted earlier with the majority classified as BB or B will suffice at this time.

Fees, Performance and Recommendation

Category

{SJNK}

ETF

{BHY5TRUU}

INDEX

Net Expense Ratio .40% -
Weighted Average Yield to Maturity 7.91% 7.75%
Weighted Average Maturity 3.23 years 3.25 years
Average Yield to the Worst 7.60% 7.33%
SEC 30-Day Yield 6.59% NA
Distribution Yield 5.65% NA (current Yield 7.07%)
Weighted Average Coupon 6.67% NA
Effective Duration/Modified Duration

2.16years/

2.36years

NA/

2.30years

12-Month Total Return -4.39% -2.03% (04/30/16)
YTD Total Return 4.81% 6.09% (04/30/16)
Shares Beta vs. Barclays US Agg Bond Tr USD -/.32 NA
Annual Portfolio Turnover 39%

NA

Click to enlarge

The net expense ratio of .40% compares favorably to the asset class median of .30% and is not an issue here. The turnover of 39% is above the asset class median of 23% but is expected due to the tremendous movements in the high yield market, the large number of holdings in the fund and the short maturity structure. The weighted average coupon of 6.67% and SEC yield of 6.59% are significantly above the asset class medians of 3.99% and 2.16%, respectively. With the weighted average maturity of 3.23 years and effective duration of 2.16 we feel this ETF is an attractive place for short term yield seekers. If the Fed returns to rising rates or if economic conditions deteriorate this ETF would suffer not only a lower NAV but a cut to its dividends as well (in the event of defaults). In addition if aggregate demand increases and the Fed gets "behind the curve" rates may invert and this may harm the NAV in the short term until the Fed "catches up." Fortunately, these scenarios are not on the horizon for the conceivable future. We also agree with the Goldman analyst noted above that fund managers are underperforming and will be moving into lower grade paper. As such, bond holders of the underlying debt and shareholders of this $2.76BLN ETF will continue to enjoy high rates of return, albeit with movements similar to high beta equities. Presently institutions and Funds own almost a combined 69% of the ETF. For those individual, (and other institutional) investors with patience and a desire for above average cash flow we do recommend allocating capital to this ETF along with the current large institutional shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information obtained from xtf.co, morningstar.com, barlclayspdrs.com, Fidelity.com, bloomberg.com, and our own analysis