Junk Bond ETFs: Old Black Is The New Black Again

If exchange trade funds inflows are an accurate gauge, market participants have largely scoffed at interest rate concerns this year while pouring billions of new assets into fixed income ETFs. Year-to-date, two bond funds rank among the top 10 asset-gathering ETFs while no bond funds are found among the year's worst outflow offenders.

That statistic du jour being bandied about is that bond ETFs listed around the world now have over $500 billion in combined assets under management. Even in what is a tricky environment for bonds and fixed income funds, high-yield corporate bond ETFs are contributing to that growth.

To this point in the fourth quarter, four of the top 10 asset-gathering ETFs are bond funds and the leader of that pack is the SPDR Barclays Capital High Yield Bnd ETF JNK. JNK, the second-largest junk bond ETF, added $2.7 billion in new assets this quarter while the rival iShares iBoxx $ High Yid Corp Bond ETF HYG has seen inflows of $2.3 billion.

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"According to Robert Polenberg, Vice President of Research, S&P Capital IQ, Leveraged Commentary and Data, as of late October, high yield bond volume is down 14% on a year-to-year basis. Meanwhile, the default rate hit a 26-month high of 2.5% in September 2015, but still is benign given the attractive yields. Polenberg also noted the cash flows for the high yield market turned positive in October, with $7.6 billion. S&P Capital IQ believes investors should have some high yield bond exposure as part of a well-diversified asset allocation strategy," the research firm said in a new note.

Amid declining Treasury yields and investors seemingly accepting of the fact that the Federal Reserve is on course to raise interest rates perhaps as early as December, the high yields sported by junk bond ETFs are alluring once again. JNK has a 30-day SEC yield of nearly 6.6 percent while HYG's 30-day SEC yield is 6.52 percent.

Still, some investors remain concerned about the impact higher rates will have on junk bond ETFs. The $3.4 billion SPDR Barclays Short Term High Yield Bond ETF SJNK has a modified adjusted duration of 2.3 years compared to 4.2 years on JNK, SJNK's longer duration counterpart. Duration measures a bond's sensitivity to changes in interest rates.

SJNK has a "6.7% 30-day SEC yield. SJNK's credit quality is closer to JNK than HYG, though it has underperformed both this year in part because long-term yields have modestly decreased," according to S&P Capital IQ.

Investors have added $75.5 million to SJNK in the fourth quarter.