ETF Showdown: The Other Junk Bond ETFs

When an investor decides to channel his inner Michael Milken and play the world of high yield bonds, affectionately known as junk bonds, two ETFs dominate the conversation. That pair is the iShares iBoxx $ High Yield Corporate Bond Fund HYG and the SPDR Barclays Capital High Yield Bond ETF JNK. HYG has over $9.9 billion in assets under management while JNK has over $8.8 billion in AUM. Those lofty numbers may make it seem as though there's only guests at the junk bond ETF party, but this week's ETF Showdown will prove otherwise as the PowerShares Fundamental High Yield Corporate Bond Portfolio PHB squares off against AdvisorShares' Peritus High Yield ETF HYLD. By three years, PHB is the older fund. HYLD made its debut in November 2010, using “a value-based, active credit approach to the markets, largely foregoing new issue participation, favoring instead the secondary market where Peritus believes there is less competition and more opportunities for capital gains.” Considering that HYLD is actively managed and home to a high 1.35 expense ratio, the fact that the ETF has garnered over $60 million in AUM in less than a year of trading is impressive. The PowerShares Fundamental High Yield Corporate Bond Portfolio, which has almost $559 million in AUM, is home to an expense ratio of 0.5%. The discrepancy is explained by PHB being passively managed as actively managed ETFs usually have far higher expense ratios than their passive counterparts. PHB is home to 201 securities, more than quadruple HYLD's roster. Both ETFs are fairly diverse at the sector level, though the PowerShares offering is a tad heavy on energy, materials and retail names. To its credit, PHB offers exposure to junk bonds from 24 industry groups with allocations ranging from 2%-9%. Food and beverage, energy, technology, retail and health care are among the sectors featured prominently in this actively managed play. Of course, one of the primary reasons investors look at junk bonds is yield. HYLD has an average current yield of 10.26% and a 30-day SEC yield of 9.86%. That throttles PHB's current yield of 6.21% and its 30-day SEC yield of 5.95%. HYLD's current yield also trumps those of HYG and JNK. On the other hand, PHB has slightly outperformed HYLD in recent months, but both could be solid options as riskier assets come back into vogue. Bull case: As we just mentioned, the more Mr. Market embraces riskier assets, the more junk bonds look attractive as an asset class, the more HYLD and PHB merit attention. Bear case: Should Europe deliver bad headlines again, we all know what will happen. Riskier assets will be severely punished. It's that simple.