Don't Own Any High Yield Bonds? Are You Sure?

by: Sandy Cliff Research

The negative news about high yield bond ETFs continues. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) in February 2013 joined the list of most-shorted ETFs.

According to IndexUniverse, the number of shares shorted on HYG last month spiked 52 percent, with the $15-billion fund making its first appearance on the Top 10 list of the biggest shorts in the ETF market.

The next few months may bring greater clarity to the world of high yield bonds. In the meantime, investors who don't own any high yield ETFs, but who do own investment grade and core bond ETFs might wish to take a closer look at their holdings to check the extent of their high yield bond coverage.

No big surprises in the listing below, but the percentage of high yield is something to be aware of. If you're a contrarian and are contemplating a high yield bond ETF purchase right now you might want to factor in your portfolio's total high yield swath.

Selected Bond ETFs and the Percentage of Their Holdings in High Yield:

  • 53.51% iShares JPMorgan $ Emerging Markets Bond (NYSEARCA:EMB)
  • 52.20% PowerShares Emerg Markets Sovereign Debt (NYSE:PCY)
  • 24.68% Vanguard I-T Corporate Bond ETF (NASDAQ:VCIT)
  • 15.66% PIMCO I-G Corporate Bond Index ETF (NYSEARCA:CORP)
  • 13.31% iShares SPCitiGroup Internat. Treasury Bd (NASDAQ:IGOV)
  • 10.43% iShares IBOXX I-Grade Corporate Bond Fun (NYSEARCA:LQD)
  • 7.11% Columbia Core Bond ETF (NYSEARCA:GMTB)
  • 4.72% SPDR Barclays International Treasury Bond (NYSEARCA:BWX)
  • 4.00% PIMCO Total Return ETF (NYSEARCA:BOND)
  • 3.47% Vanguard Short-Term Bond ETF (NYSEARCA:BSV)
  • 2.69% iShares Core Total US Bond Market (NYSEARCA:AGG)
  • 2.39% iShares S&P National AMT-Free Muni Bond (NYSEARCA:MUB)
  • 0.00% Vanguard Total Bond Market ETF (NASDAQ:BND)

Numerous recent articles have suggested major trouble for high yield bond ETFs and point alarmingly to huge drops suffered by high yield mutual funds in 2008. Getting a long-term perspective on high yield's fragility, especially in the ETF universe, is difficult because so few bond ETFs were around in 2008. The SPDR Barclays High Yield Bond (NYSEARCA:JNK) was one of the few and it dropped a whopping 25.67% in 2008.

On the other hand, let's put that big drop into perspective. if you take a look at some very respected and popular mutual funds returns in 2008, the scenarios were equally, if not more, disastrous. The Dodge & Cox Balanced Fund (MUTF:DODBX), a moderate allocation mutual fund and a staple of many retirement funds, dropped 33.57% in 2008; Vanguard's Wellington (MUTF:VWELX), also a moderate allocation fund, dropped only 22.30% in 2008; and Fidelity Contrafund (MUTF:FCNTX), the large growth fund, dropped 37.16%.

For a further perspective on things, take a look at the 5-year returns for these funds, with the ETF JNK coming out ahead by a respectable margin.

  • JNK: +9.08%
  • DODBX: +5.54%
  • FCNTX: +6.43%
  • VWELX: +6.45%

There are plenty of reasons to be cautious about high yield bonds, but the caution should probably be spread around a little more. Granted there are major outflow concerns building, but high yield bonds are not the only investments that drop when the news and numbers turn sour.

Disclosure: I am long LQD, VCIT. 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.