In part two, we will compare two short-term high-yield bond funds: the PIMCO 0-5 Year High Yield Corporate Bond (NYSEARCA:HYS) and the SPDR Barclays Short Term High Yield Bond (
Short-term high-yield bonds are attractive for their shorter duration, yet still have nearly as high of an yield. Even though these two funds have durations roughly 2 years shorter than HYG and JNK, their yields are comparable due to wider spreads versus treasuries at the short end of the yield curve. SJNK's 30-day SEC yield of 5.85 percent is higher than HYG's 5.68 percent yield and nearly as high as JNK's 6.15 percent yield.
Index & Strategy
HYS tracks the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index while SJNK tracks the Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. HYS is the older of the two, coming to market in June 2011, while SJNK launched in March 2012.
These two funds have a correlation of 0.9964.
The big difference between the funds is that HYS has about 6 months shorter duration and a lower yield.
The yield difference is a reflection of credit quality. SJNK has 1 percent of assets in BBB or higher-rated debt; 44 percent of assets in BB rated; 36 percent in B rated; and 19 percent in CCC or lower.
HYS has 7 percent of assets in BBB-rated debt; 33 percent in BB rated; 32 percent in B rated; and 12 percent in CCC or lower. HYS also has 11 percent in unrated debt and 3 percent in government bonds.
SJNK trades many more shares per day, but its price is about one-quarter of HYS's price. By dollar volume, the two funds trade a similar amount each day.
SJNK is clearly the cheaper fund with 0.15 percent lower expenses.
Although HYS is more expensive and has a lower yield, it has consistently outperformed SJNK since SJNK's inception in March 2012. The price ratio chart compares HYS to SJNK, a rising line indicates HYS is outperforming. HYS increased its lead as oil prices weakened in 2014, a result of low exposure to the energy sector.
SJNK has a 30-day SEC yield of 5.85 percent and HYS has a yield of 4.81 percent. Both SJNK and HYS have seen their payouts decline along with interest rates (data from provider websites).
HYS also paid out capital gains in 2013 and 2014, but those were not included in the above chart.
Risk & Reward
SJNK has less than 3 years of history, but HYS has a beta of 0.73 versus the Credit Suisse HY Index. HYS has a standard deviation of 3.37 versus 4.73 for the category.
HYS has less exposure to the energy market and that helped in 2014. Depending on how investors see that market playing out in 2015, they may prefer to favor one over the other.
We haven't yet seen how these funds will perform in a bear market for high-yield debt, but HYS may do better based on having higher credit quality in the portfolio.
Short-term high-yield funds have less interest rate risk than funds such as HYG and JNK. They may have higher default risk in a major crisis since more of the bonds in the short-term debt fund will come due in any given year. In 2008, for example, firms faced very tight credit markets and those needing to rollover debt came under the greatest stress.
HYS has outperformed SJNK since inception. It yields about a full percentage point less, but it has delivered superior total returns. Given the superior credit quality and still healthy 4.81 percent yield, HYS is the better choice.
Compared to HYG, the fund we picked in part one, HYS has been competitive.
Between these two, HYS has superior credit quality, but it hasn't outperformed HYG in total return. HYS should perform better in a rising rate environment that was due to a strong economy, since it is less sensitive to rising rates. Since the Federal Reserve is likely to raise rates at the short end this year and the economy remains in expansion, HYS looks like the better choice in 2015.
Before we crown HYS the top junk bond fund for 2015, however, there is still another group of ETFs to consider: high-yield municipal bonds. Those will be covered in the next part of the series.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.