Too Much Of These Sectors Is Hurting Junk Bond ETFs

With just a few days remaining in 2015, it is fair and accurate to say high-yield corporate bond exchange-traded funds have been pinched by myriad of factors this year. Chief among those factors has been a spate of defaults by energy issuers.

That issue has been a thorn in the side of the iShares iBoxx $ High Yid Corp Bond (ETF) HYG and the SPDR Barclays Capital High Yield Bnd ETF JNK, the two largest high-yield corporate bond ETFs, among others.

Related Link: More Troubling Energy News For Junk Bond ETFs

Tensions Are High In The Junk Bond Market

Amid a spate of energy issuer defaults and downbeat performances by CCC-rated issues, tensions are running high in the U.S. junk bond market.

HYG allocates 11.4 percent of its weight to energy sector junk bonds, the ETF's fourth-largest sector allocation behind communications, consumer staples and consumer discretionary. A combined 9 percent of the ETF's lineup is rated CCC or CC.

Part of the problem: There is no dearth of junk bonds hailing from the moribund energy and materials sectors.

Energy And Materials Influence

“The energy and materials sectors have been the sore spot for the high yield market, given the anxiety over credit quality, as current low prices in oil and commodities, along with a Fed increase in rates, may be a cause for concern for future earnings and the cost of capital. The return of the S&P U.S. Issued High Yield Corporate Bond Index ex energy and materials sectors would be less affected, returning -2.14 percent for the month and -0.05 percent YTD,” said S&P Dow Jones Director of Fixed Income Indices Kevin Horan in a recent note.

In what could be seen as good news, in a strange world, the dollar amount of energy and materials junk bonds floating around today is off its highs. It is also well above its lows.

“At its highest in September 2014, the energy sector reached USD 207 billion and has since dropped to USD 122 billion.  Materials was as low as USD 33 billion in March 2009 before peaking at USD 102 billion in December 2014, and it was at USD 81 billion par outstanding as of Dec. 16, 2015,” added Horan.

Here is one way of looking at how the size of energy and materials issues impact the high-yield bond space. HYG allocates 11.1 percent of its weight to energy junk debt, but the energy and materials sectors combine for barely more than 9 percent of the S&P 500's weight.

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