10 Years Later: A Big Junk Bond ETF Comes Of Age

With over 2,000 exchange traded products trading in the U.S., at least a few celebrate a birthday on any given trading day. Not all of these birthdays are notable occasions, but the iShares iBoxx $ High Yield Corporate Bond ETF HYG celebrating its 10^th birthday on Tuesday is noteworthy.

Though it isn't the largest high-yield corporate bond fund (there is a junk bond mutual fund that is larger), HYG is the biggest high-yield bond exchange traded fund. It isn't a stretch to say that in its decade of trading, HYG has made junk bonds more accessible to more investors and changed the way investors of all skill levels access this asset class.

Now home to $18.6 billion in assets under management, HYG isn't just the largest junk bond ETF; It's one of the largest fixed income ETFs of any type. Only a handful of bond ETFs are larger.

“Despite its size, HYG is not the high yield fund with the most assets. That distinction is held by Vanguard High Yield Corporate Fund (VWEAX), which has $22 billion in assets across multiple mutual fund share classes,” said CFRA Research in a note out Tuesday. “HYG's net 0.50% expense ratio is less than half of the mutual fund average (1.1%), but is higher than VWEAX's 0.13%. While high fees are more common with smaller portfolios, AB High Income (AGDCX) charges 1.58% and has $1.3 billion in its C share class (8 billion in total assets).”

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Even at its size, HYG represents a mere 2 percent of the total junk bond market, a factoid that potentially allays fears that the ETF is too big and represents too large of a slice of a corner of the bond market that's often illiquid. Speaking of liquidity, data suggest HYG has plenty of it.

“HYG can provide an alternate venue for liquidity when the bond market is closed or impaired. For example, in 2016 HYG traded an average $1.7 billion on the exchange on Veterans Day and Columbus Day,” said BlackRock.

It's also easy to see why HYG has become a favorite of professional junk bond traders. A typical bid/ask spread on the ETF is just one basis point compared to 50 basis points on the average individual junk bond ETF, according to BlackRock data.

“While much of the daily volume stems from institutional investors, BlackRock notes that retail investors make up approximately half of the fund holders,” said CFRA. “We think this highlights that bond ETFs are gaining in traction for asset allocation portfolios, rather than preparing to enter their 'awkward' teenage years.”

CFRA rates HYG overweight.