Feel The Love For Junk Bond ETFs

On a year-to-date basis, corporate bond exchange traded funds have been out of favor with fixed income investors amid fears of higher interest rates. Three of the top 10 ETFs in terms of 2018 outflows are corporate bond funds, including one junk bond ETF.

Many investors departed high-yield corporate bond ETFs earlier this year amid concerns about the Federal Reserve's plans to hike interest rates multiple times.

What Happened

While investors departed junk bond ETFs early in 2018, some data points indicate that tide is turning in favor of these funds.

“Investors pulled money from high yield bond ETFs in the first quarter, but demand has been building since then, and to start the fourth quarter it has accelerated,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a Monday note.

“Indeed, iShares iBoxx $High Yield Corporate Bond ETF HYG had the largest day of inflows with more than $700 million to start the quarter. Nonetheless, the ETF was trading the next day at just a slight premium to its net asset value, confirming that unexpected trading volume is not necessarily a reason for concern.”

HYG is the largest junk bond ETF in the U.S. Year-to-date, investors have pulled $1.99 billion from HYG, but the fund saw third-quarter inflows of just over $909 million.

Why It's Important

Some rivals to HYG have recently been adding money as well. Those funds include the SPDR Bloomberg Barclays High Yield Bond ETF JNK and the Xtrackers USD High Yield Corporate Bond ETF HYLB.

“High yield ETFs pulled in more than $1 billion in the first two days this month,” said Rosenbluth. “To put the recent demand in perspective, high yield corporate bonds gathered $2.4 billion in the third quarter, partially erasing the year-to-date outflows for the investment style.  In contrast, investors consistently favored investment-grade corporate bond ETFs that provide greater capital preservation than their high-yield siblings.”

Since the start of the fourth quarter, HYLB has seen inflows of $15.11 million. The ETF does not turn two years old until December and already has nearly $2 billion in assets under management.

What's Next

Corporate default rates are low this year, potentially enticing investors to embrace some of the credit risk associated with the aforementioned ETFs.

“While the credit risks remain prevalent, the 61 global corporate defaults year-to-date tallied by S&P Global Ratings are lower than in recent years,” said Rosenbluth. “According to CFRA Research, HYG, JNK and HYLB provided similar credit exposure, with approximately 47 percent of assets rated BB and 5 percent rated BBB.”

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