High Yield Bond ETFs Grapple Higher

High yield bonds, otherwise known as junk bonds, have traveled an arduous path over the last twelve months.  These decidedly sensitive credit securities fell out of favor in the fourth quarter of 2014 as fears over wavering stock gains spilled over into riskier fixed-income assets. 

Nevertheless, junk bond ETFs have defied expectations by pressing higher over the last four months and recently broke out to new 52-week highs.  Income investors that purchased these

The iShares iBoxx High Yield Corporate Bond ETF (HYG) is the largest barometer of high yield credit in this space with over $17.6 billion in total assets.  HYG invests in over 1,000 individual securities of below investment grade companies such as T-Mobile USA (TMUS) and Ally Financial Inc (ALLY). 

Since the beginning of the year, HYG has gained 3.43 percent and attracted more than $2.9 billion in new assets. 

This trend clearly shows that investors are hungry for yield and willing to bet on the strength of U.S. companies to enhance their income streams.  HYG has a current 30-day SEC yield of 5.18 percent, an effective duration of 4.00 years, and charges an expense ratio of 0.50 percent.

Another well-known fund in this space is the SPDR Barclays High Yield Bond ETF (JNK), which has also seen nearly $2 billion in inflows so far in 2015.  The nearly 800 credit securities in JNK are skewed towards slightly lower rated debt, which presses the yield on this ETF in excess of 5.60 percent.

The largest holding in JNK is a Spring Corp (S) bond maturing in 2023.  That difference in yield and adjusted duration has produced a slightly enhanced total return this year as well.  JNK has gained just under 4 percent so far in 2015. 

Other ETFs that have prospered during this rally are the shorter duration equivalents in the PIMCO 0-5 Year High Yield Corporate Bond ETF (HYS) and SPDR Barclays Short Term High Yield Bond ETF (SJNK).  Both of these ETFs take a slightly different tact from their sector peers by investing in a basket of high yield bonds with closer maturity dates. 

This tends to lessen the price fluctuations of the portfolio along with sensitivity to interest rate moves.