ETF Showdown: Jumping For Junk (HYG, IHY, HYXU)

In a market environment that seems to be putting a premium on eschewing risk, it might not feel like like the right time to be embracing high-yield, or junk, bonds. The iShares iBoxx $ High Yield Corporate Bond ETF HYG and the SPDR Barclays Capital High Yield Bond ETF JNK, two of the largest junk bond ETFs, haven't exactly been slammed recently, but neither is setting the world on fire as both are down about 1% in the past month. Simply put, there's a catch-22 investors have to contend with when it comes to junk bond ETFs. Yields on cash instruments are anemic and will remain so for at least another two years because the Federal Reserve wants it that way. That makes junk bonds alluring. Still, this is a risk on asset class with a host of red flags such as decompressed spreads, share creation problems and funds trading at substantial discounts to their net asset values, as Zero Hedge recently noted. Even with the risks, ETF sponsors still keep churning out new junk bond ETFs and April has brought an increased pace of high-yield bond ETF debuts. Two of those funds square off in this week's "ETF Showdown," the iShares Global ex USD High Yield Corporate Bond Fund HYXU and the Market Vectors International High-Yield Bond ETF IHY. Both funds debuted on April 3 and have thus far done an excellent job of attracting assets from investors. IHY is now home to $19.6 million in assets under management while HYXU has $24.4 million in AUM, two sturdy totals for less than two weeks of life. Both ETFs feature non-U.S. issues denominated in Euros, U.S. dollars, Canadian dollars or pounds sterling. More than 79% of HYXU's holdings are euro-denominated. Both funds have expense ratios of 0.4%. IHY is heavy on industrial and financial services names at the sector level, though the industrials umbrella includes energy, health care, technology and telecom, just to name a few. Industrials, consumer goods and conumer staples account for almost two-thirds of HYXU's weight. Looking at the credit quality of the two funds as rated by Standard & Poor's, IHY actually has 4.3% allocation to BBB-rated issues and that's an investment-grade rating. About 77% of the fund is rated BB or B with 15.6% of IHY's issues not rated by S&P. HYXU offers scant investment grade exposure and about 71% of its issues are found in BB+ to B- universe. Only 7.4% of HYXU's issues aren't rated by S&P. Pertaining to IHY, as of March 27, the index tracked by the ETF featured just over 1,000 non-investment grade issues of 546 corporations located in 69 countries, including a 33% allocation to emerging markets bonds, Van Eck said in a statement. On the other hand, eight countries are found in HYXU's lineup, including six Euro Zone members. The U.K. and Canada are the exceptions. Again, there are risks with junk bond ETFs. As Market Vectors notes on its Web site: "The secondary market for securities high yield securities may be less liquid than the markets for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities." Not to mention, if HYXU and IYU start trading at steep discounts to their NAVs, a potentially punishing arbitrage opportunity could arise where traders go long junk bond ETFs while shorting the bonds in a particular ETF's index. Translation: Junk bonds never have been and never will be for the faint of heart. All that said, should IHY and HYXU be deemed worthy of your investment dollars, opt for IHY due it emerging markets exposure and probably monthly dividend. HYXU's Euro Zone-heavy lineup could be in for more credit downgrades, deeper moves into junk status and higher yields.