A Global Approach To High-Yield Bond ETFs

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Includes: HYG, HYXU
by: Tom Lydon

Junk bonds have lost momentum as the markets shifted away from riskier assets on concerns that the Fed would cut back its bond purchasing program. However, investors can take an alternative approach with a globally oriented high-yield bond exchange traded fund.

The iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG) lost $798.1 million in assets over the past week, according to IndexUniverse. Bank of America calculates that U.S. high-yield funds recorded $4.8 billion in redemptions, the largest outflow on record, this week, Bloomberg reports.

"Investors' concerns about the effects of Fed tapering on high-yield assets reached a fever pitch this week," Barclays Plc strategists Jeffrey Meli and Brad Rogoff, said in a report. "This is a reflection of market fears that all risk asset valuations will be weaker when QE ends."

Specifically, bond investors are worried that rising rates would weigh on prices. HYG has a 4.19 year effective duration. The effective duration is a measure of sensitivity to changes in interest rates - longer effective durations will translate to a greater price depreciation in the event of a rise in interest rates.

Investors, though, can take a look at the iShares Global ex USD High Yield Corporate Bond Fund (BATS:HYXU), which holds high-yield corporate debt denominated in euros 86%, British pound sterling 7.6% and Canadian dollars 3.8% - the fund will be subject to currency risks. The ETF has a 0.40% expense ratio, 3.19 year effective duration and a 4.44% 30-day SEC yield.

HYXU is up 2.8% year-to-date and gained 23.5% over the past year. In comparison, HYG is up 1.5% so far this year and rose 11.8% over the last year.

Top sector allocations include 22.3%, consumer goods 16.4%, financials 15.3%, consumer staples 10.8% and telecom services 8.7%.

Top country allocations include France 14.9%, Netherlands 13.5%, Luxembourg 13.1%, U.K. 12.4%, Germany 8.7%, Canada 6.8%, Italy 6.4%, Spain 4.5%, Ireland 3.0% and Portugal 3.3%.

Credit quality is BBB- 2.6%, BB+ 20.0%, BB 19.0%, BB- 14.1%, B+ 15.8%, B 8.6%, B- 5.4%, CCC+ 2.9%, CCC 0.3% and CCC- 0.7%.

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own HYG.

Disclosure: I am long HYG. 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.