Why You Should Steer Clear Of Junk Bond ETFs

Junk bond ETFs have been suffering of late as investors in the United States have been shunning the high-risk segments of the domestic debt markets. Moreover, the recent fund flow reflects the shift in sentiment among investors and how they are adapting to changing circumstances.

What's Driving the ETFs?

The first quarter was dismal for the U.S. markets. Moreover, Wall Street saw a glum start to the second quarter, thanks to continued pessimism in the market. Although stocks grabbed most of investor attention, high yield credit also saw some loss in favor.

After a correction in early February owing to interest rate and inflation fears, markets recovered some of its losses to end the month on a slightly better note. However, March was not favorable for markets across the globe, as fresh trade war fears started affecting markets.

The recent market turmoil has been strongly weighing on investors' risk appetite and making them reallocate their portfolios. The volatility has forced investors to safeguard their portfolios by allocating money to safer assets, in the event of a potential market breakdown.

Moving on to interest rates, the Federal Reserve hiked interest rates by 25 basis points in Powell's first meeting as chairman. The new benchmark funds rate was raised to 1.5% to 1.75% in March. Per the CME Fed watch tool, two more hikes are expected in 2018. This might lead to higher bond yields and lower bond prices, as the spread over treasuries decline.

Per an etf.com article citing FactSet data, passively managed high-yield ETFs witnessed $5.4 billion in outflows in the first quarter of 2018. Moreover, owing to fears of rising rates, investors are flocking to duration hedged ETFs. Per FactSet data, duration-hedged ETFs received $509 million in the first quarter.

Below we discuss a few ETFs that seek to provide exposure to the high-yield space.

iShares iBoxx High Yield Corporate Bond ETF HYG

This fund has AUM of $15.1 billion and seeks to provide exposure to high-yield bonds. It charges 49 basis points as fees per year. From a sector look, Communications, Consumer Non-Cyclical and Energy are the top allocations of this fund, with 23.4%, 13.9% and 13.8% exposure, respectively. The fund targets the short-to-intermediate end of the yield curve as it has a weighted average maturity of 4.79 years and an effective duration of 3.85 years. The fund has lost 1.1% year to date but returned 2.5% in a year. It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

SPDR Bloomberg Barclays High Yield Bond ETF JNK

This fund has AUM of $8.8 billion and seeks to provide exposure to high-yield bonds. It charges 40 basis points as fees per year. From a sector look, Industrial, Finance and Utility are the top allocations of this fund, with 86.7%, 9.2% and 3.1% exposure, respectively. The fund targets the short-to-intermediate end of the yield curve as it has an average maturity of 6.16 years and option-adjusted duration of 4.06 years. The fund has lost 1.4% year to date but returned 2.7%in a year. It has a Zacks ETF Rank #4 with a High risk outlook.

PIMCO 0-5 Year High Yield Corporate Bond Index Fund HYS

This fund has AUM of $1.6 billion and seeks to provide exposure to high-yield bonds. It charges 55 basis points as fees per year. From a sector look, High Yield Credit, Investment Grade Credit and U.S. Government-Related are the top allocations of this fund, with 97.9%, 1.2% and 0.6% exposure, respectively. The fund targets the short end of the yield curve as it has a weighted average maturity of 3.24 years and an effective duration of 2.09 years. The fund has returned 3.6% in a year. It has a Zacks ETF Rank #4 with a High risk outlook.

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