Popular High-Yield Bond ETFs Stumble

Includes: HYG, JNK
by: John Spence

Investors who have piled into high-yield ETFs indexed to corporate “junk” bonds may be in for a choppy ride if upbeat investor sentiment on the economy wanes.

The iShares iBoxx High Yield Corporate Bond (NYSEARCA:HYG) and SPDR Barclays High Yield Bond (NYSEARCA:JNK) are on a three-day losing streak. The junk bond ETFs are also heading for a test of the 50-day simple moving average for the first time this year. Some technical analysts watch high-yield ETFs as an indicator for how comfortable investors are with taking on risk.

The junk bond funds are among the top ETF sellers in 2012 with income-hungry investors looking for more options outside low-yielding Treasuries and money market funds. “Since the beginning of the year, retail investors have sunk almost $12 billion into junk bond mutual funds,” ETF Guide reports.

Investors are “chasing higher yields from ‘junk’ bonds, because they’re not getting enough income from investment grade corporate bonds, dividend paying stocks, money market funds, or U.S. Treasuries,” it said. “And as result, they are taking on more financial risk.”

The junk bond ETFs are yielding more than 7%. Both funds hold over $10 billion in assets.

“Investors of all stripes are once again piling into ‘junk’ bonds,” according to a recent Wall Street Journal article. “The buyers are coming from both sides of the investing fence—from bond investors eschewing the low yields of U.S. Treasury debt to stock investors seeking protection from swings in the market.”

iShares iBoxx High Yield Corporate Bond ETF

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