Despite the recent outflows seen in the high-yield corporate debt exchange traded fund category, there are still reasons investors should consider these fixed income products.
Corporate junk bond ETFs are offering much higher yields than U.S. Treasuries.
There are a number of factors that support the high yield corporate debt category. Of course yield is a big reason, due to the constant search for income in today's market. Downside protection is another reason to favor corporate debt, as well as good fundamentals.
Simon Smith for ETF Strategy reports that equity yields have been pushed lower recently, according to Fran Rodilosso, the high yield bond portfolio manager at Van Eck's ETF group MarketVectors. This signals a weakness that stocks have in comparison to high yield credit markets. For example, global equities underperformed global high yield corporate debt, as measured by BAML Global High Yield Index, by a wide margin in 2008.
As far as fundamentals, the high yield corporate debt space is not facing rising debt over the next few years. Rodilosso notes that default rates remain low and spreads more than compensate for default at current rates. Companies are looking healthier than they were 5 years ago, while developed market governments are not.
Some high-yield ETFs include:
- SPDR Barclays Capital high Yield Bond ETF (JNK)
- Pimco 0-5 Year High Yield Corporate Bond Index Fund (HYS)
- Market Vectors Fallen Angel High Yield Bond ETF (ANGL)
Tisha Guerrero contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.