High-yield bond exchange traded funds have been popular options with income-starved investors in 2011, but the ETFs have been under pressure in recent weeks after a fierce rally from the October low.
“Junk” bonds bounced last month on hopes the economy would avoid a recession and as the yield spread between Treasuries and high-yield bonds narrowed.
Junk bond ETFs have higher yields than U.S. government debt to compensate investors for the extra risk, and high-yield bonds are sensitive to the economic outlook. So their recent weakness is a worrying sign.
“Corporate bonds are denoted high-yield for the sole reason that firms issuing them are highly leveraged. Companies with this kind of leverage profile can get there either intentionally (because of a leveraged buyout, leveraged acquisition, or recapitalization) or unintentionally (because of a deterioration of the underlying business of an erstwhile investment-grade firm),” Timothy Strauts for Morningstar noted in an analyst report.
A junk bond is a corporate bond, rated BB or lower, that is issued by companies with lower credit ratings.
The iShares iBoxx $ High Yield Corporate Bond Fund and PowerShares High Yield Corporate Bond have been top ETF sellers this year, raking in net inflows of $2.9 billion and $2.2 billion through October, respectively, according to National Stock Exchange data. The ETFs are yielding around 8%.
iShares iBoxx $ High Yield Corporate Bond Fund
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Tisha Guerrero contributed to this article.