Seeking Alpha

High-Yield ETFs vs. High-Yield Mutual Funds

Includes: HYG, JNK
by: Tom Lydon

ETFs may have siphoned billions of investment money out of mutual funds in the past year, but when it comes to high-yield bonds, mutual funds are bringing a competitive game.

In March, more than $1 billion found its way into two of the largest high-yield ETFs: the iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK), indicating investors’ growing interest in high-risk/high-yield bonds and increasing confidence in the economic recovery, comments Don Dion for TheStreet.

HYG has an index with 300 holdings, an expense ratio of 0.50% and a 8.1% yield. As a result of the fund’s large holdings, the fund has a very equal weighting among its holdings, with its top 10 holdings only accounting for 10% of its portfolio. Top holdings include debt of Texas Competitive Electric (NYSE: NRG) and Sprint Nextel (NYSE: S)

JNK has an expense ratio of 0.40% and 8.3% yield. JNK’s index is more concentrated, compared with that of HYG’s. JNK’s top 10 holdings make up almost 20% of the fund’s total index. Top holdings include debt from AIG (NYSE: AIG), GMAC (NYSE: GJM) and Citigroup (NYSE: C).

Some of the benefits high-yield ETFs enjoy over similar mutual funds include:

  • Similar to the ETF offerings, mutual funds that offer access to high-yield debt also track a select basket of low-grade corporate debt. However, the mutual fund offerings take an active approach while HYG and JNK are designed as passive products.
  • Mutual funds rely on the know-how of their managers, which means higher expense ratios. Mutual fund expense ratios can exceed 1.0% and can incur short-term fees for shares held less than 90 days.
  • The higher fees also mean that the mutual funds pay out lower yields.
  • Mutual funds lack intraday liquidity, transparency and frequently have hefty investment minimums, as well.

When it comes down to total returns, leading high-yield mutual funds have recorded total returns of up to 20% in the past two years, whereas JNK and HYG have provided 12.8% and 11.1%, respectively. Still, HYG and JNK are better for short-term trades because of their transparency, ability to trade throughout the day and lack of short-term trading fees. Mutual funds may be the better choice for long-term investing due to their total return outperformance.

Max Chen contributed to this article.

Disclosure: Tom Lydon’s clients own shares of JNK.