Opportunity in Junk Bond ETFs

In our current market environment anyone that has avoided exposure to the havoc that is the energy sector is certainly breathing a sigh of relief. Investors in the high yield bond market that chose “fallen angels” as opposed the broader market are also feeling relieved. Fallen angels corporate bonds are bonds that were investment grade at one point but have since fallen to below investment grade. The bonds typically have less exposure to the energy sector than their standard high yield counterparts, despite the large presence that energy has is the high yield bond market which has grown from 8 to 16 percent in 2014. The two respective categories are tracked by the, BofA Merrill Lynch US Fallen Angel High Yield Index and the BofA Merrill Lynch US High Yield Master II Index. The former is up 7.3 percent year to date while the latter is lagging with a gain of 2.1 percent. Now a look at how investors in related ETFs would have fared this year. The Fallen Angel High Yield Bond ETF ANGL is made up of 146 below investment grade corporate bonds denominated in U.S. dollars, that were investment grade at their time of issuance and have since fallen to below investment grade. ANGL is distributed across 13 countries and nine sectors. The U.S. is the most heavily weighted country at 64 percent and the financials make up 31 percent of the sector breakdown. Energy bonds only account for a 4.6 percent weighting in the portfolio. As far as bond rating goes 74.5 percent of the bonds in the ETF are rated BB while 16 percent are B. ANGL is down 1 percent year to date and down 6 percent over the last six months. The ETF has an expense ratio of 0.40 percent. The iShares iBoxx $ High Yield Corporate Bond ETF HYG follows 1,008 high yield corporate bonds. The ETF is distributed across 13 sectors with consumer services at 15 percent, oil & gas at 14 percent, and telecommunications coming in at 13 percent being the most heavily weighted sectors. The majority of the bonds (48 percent) have a rating of BB at 48 percent followed by a rating of B at 31 percent. HYG is down 4 percent year to date, down 7 percent over the last six months, and has an expense ratio of 0.50 percent. The SPDR Barclays High Yield Bond ETF JNK consists of 774 corporate high yield bonds rated BB or lower. The ETF is distributed across three sectors with the industrials making up 88 percent of the portfolio, finance with an 8 percent weighting, and utilities at 4 percent. The ratings breakdown has 40 percent of the bonds rated BB, 43 percent are rated B, and the remaining 16 percent are CCC or lower. JNK is down 6 percent year to date and 8 percent over the last six months. The high yield bond ETF has an expense ratio of 0.40 percent. Fallen angles ETFs may be the best opportunity at this given time for someone who is looking to get into the high yield bond market despite its underperformance. The low exposure to the energy and industrial sectors lowers the risk that is associated with lower oil prices and an increase in the probability of defaults in the area.