Is The High-Yield Bond ETF Party Finally Over?

Includes: HYG, JNK
by: Tom Lydon

Junk bond exchange traded funds have raked in assets by yield-seeking investors over the past couple years. Investors have been buying these tools quickly, pushing yields to record lows, leaving some wondering if the party is over in the market for speculative-grade corporate debt.

In fact, yields in the two largest junk bond ETFs are poised to fall below 5% for the first time.

"Since 1989, the high-yield sector has seen 12 drawdowns greater than 5%. The high-yield sector of the fixed-income market is what's known as a high-kurtosis or so-called fat-tailed' asset class. Extreme market events tend to happen more frequently in assets classes exhibiting 'fat-tailed' return distributions than in other asset classes," Timothy Strauts wrote for Morningstar.

After four years of solid returns and large payouts, the junk bond exchange traded fund party may be over. Still, every time experts say noninvestment grade yields can't go down further, they set another record low. Bond prices and yields more in opposite directions.

Investors have been pulling out of bonds and back into equities as the market sentiment has shot up, reports Eric Dutram for Zacks. About $77 billion has flowed back into U.S. equities in January, the largest inflow seen since 2000. In turn, investors have focused attention away from the bond market and into the MLP or REIT asset classes.

The two most popular junk bond ETFs have combined outflows over $1.1 billion year to date. SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) and the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG) both focus on intermediate term corporate bonds.

HYG focuses in on consumer services, oil and gas and financials. 'BB' bonds make up nearly 38% of the portfolio while 'B' rated securities comprise the rest. It yields 6.08% in annual dividends, 5.06% in 30-day SEC yield and 5.54% in yield to maturity, with $15.2 billion in assets.

JNK pays out 6.25% in dividends, 5.21% in 30-day SEC yield and 6.25% in yield to maturity. The index is made up of fixed-rate, taxable, low rated corporate bonds that are 'BBB' and under. Assets under management are around $12 billion.

iShares iBoxx $ High Yield Corporate Bond Fund

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon's clients own HYG and JNK.

Disclosure: I am long HYG, JNK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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