Junk Bond ETFs Are Getting Cheaper, Too

With exchange-traded funds issuers seemingly reducing fees on various products by the week, it stands to reason that new funds coming to market will feature low fees, too. That is the case with the newly minted iShares Broad USD High Yield Corporate Bond ETF USHY, which offers investors a low-cost alternative to investing in junk bonds.

The iShares Broad USD High Yield Corporate Bond ETF, which debuted last week, has an annual expense ratio of 0.22 percent, or $22 on a $10,000 investment. That makes the new iShares fund the least expensive junk bond ETF on the market.

USHY tracks the BofA Merrill Lynch U.S. High Yield Constrained Index and holds nearly 1,900 high-yield corporate bonds. The new ETF can be seen as a low-cost alternative to the iShares iBoxx $ High Yield Corporate Bond ETF HYG, the largest junk bond ETF in the U.S.

A Diversified Approach

To be precise, USHY has 1,873 positions from 936 issuers, according to issuer data. By comparison, HYG holds 990 bonds from 383 issuers.

“Investors are increasingly looking for new ways to access bond markets through ETFs,” Steve Laipply, Head of U.S. iShares Fixed Income Strategy, said in a statement. ”More recently, some investors have expressed interest in capturing even more high yield opportunities across credit quality, issuer size and industry, but it just was not available through an ETF until today. With USHY, investors with a longer term investment horizon can now access a large universe of high yield exposures.”

USHY was seeded with $50 million, indicating robust, immediate interest among investors. Right out of the gates, USHY is one of the most successful fixed income ETFs to debut in 2017.

Credit, Interest Rate Points

USHY has an effective duration of 3.73 years. Duration measures a bond's sensitivity to changes in interest rates.

Nearly 41 percent of the new ETF's holdings are rated BB while over 36 percent are rated B. Another 12.6 percent are rated CCC. Junk bonds with “C” ratings are considered highly speculative.

“While we fully expect HYG will remain the vehicle of choice for professional traders and other investors, USHY is ushering in a new generation of bond ETFs that investors can also use in a variety of ways,” said Laipply. “As technology continues to drive product and market structure innovation, we can only expect this trend to accelerate. Accordingly, we believe that bond ETFs have the potential to reach $1.5 trillion in assets by 2022.”

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