Despite the low rate environment, the bond market is seeing a
great deal of popularity as of late. Yet although the broad
sector is seeing significant inflows, many investors are zeroing
in on the high yield segment instead thanks to their outsized
yield and the relatively low default levels that these securities
have seen over the past few years.
This combination has made them increasingly popular
destinations for yield starved investors who don't really want a
huge upgrade in risk, but are willing to look beyond U.S.
Treasury markets as well.
High Yield Bond Market
High yield bond
invest in below investment grade securities (often called junk
bonds), which are more volatile than the top rated ones with
similar maturities. Investing in high yield bonds is a risky
choice as these have a much higher default rates than Treasury
Forget T-Bonds, Invest in These Top Corporate
An outsized default rate can result in lower returns overall,
although the higher yields do help to compensate for the added
risks. Additionally, these bonds are vulnerable to economic
downturns and can be hurt by a rising interest rate
Currently, interest rates remain at a subdued level. As the
Euro-zone continues to be a mess, U.S. recovery remains spotty
and a worse-than-expected slowdown shrouds the emerging
economies, the rates are unlikely to go up any time soon (Read:
Is The Bear Market For Bond ETFs Finally
). Further, default rates would rise but at a modest pace and
could remain below the long-term average of about 4%.
However, the current default rates seem to be lower when
compared to historical levels for junk-rated securities. But
yields in this sector still offer a significant premium over the
more highly rated Treasury bonds.
Further, junk bonds tend to be more short-duration focused,
suggesting that when rates eventually do rise, these securities
are likely to be less impacted than their peers. All these
situations call for an ideal condition for high yield bond
investing in the short-term (Read:
Do You Need A Floating Rate Bond ETF?
Rather than playing directly on the bond markets, investors
can look towards bond ETFs as these often offer up a more
diversified and lower risk choice in this uncertain market
segment. In addition to greater flexibility in terms of trading
and tax liabilities, ETFs provide investors better transparency
while the basket approach helps to cut down on risk and
volatility when compared to single bond investments.
Here, we look at the domestic high yield bond ETFs, which
offer an attractive upside potential and strong returns. Given a
low rate environment, strong bond fundamentals and an uncertain
economic growth, yield-hungry investors find it difficult to
ignore this opportunity to tap meaty dividends (Read:
Follow Buffett With These Developed Market Bond
Peritus High Yield ETF (
Investors seeking capital appreciation in addition to high
yields may find AdvisorShares entrant in December 2010, an
attractive play in the bond market. This is an actively managed
fund with securities that offer the best value and least credit
risk to investors in the high yield space.
The fund focuses on the junk corporate market, with the lower
effective duration of roughly 3.46 years, higher average yield to
maturity of 11.57% and a higher average coupon rate of 9.67%
Are Investors Taking Another Look At Junk Bond
In terms of credit quality, HYLD focuses on low-investment
grade bonds (B+ and lower) and holds about 40 securities. With
AUM of $177 million, the product has an average bond maturity of
five to ten years. It also invests in certain equities, which pay
higher dividends or are otherwise consistent with the fund's
investment objective, to a lesser extent.
The ETF is widely diversified across sectors. Healthcare takes
the top position in the basket followed by transportation and oil
& gas (Read:
Could The Small Cap Healthcare ETF Be A Great
The product has gained added a few percent in the past year
and trades in volume of about 35,000 per day on average. It pays
out a high annual dividend yield of about 8.93% per annum.
The 30-day SEC yield is greater at 9.1%. Nevertheless, the
fund charges a fee of 1.36% per year, which looks expensive, and
has a higher portfolio turnover ratio of 81% on average.
SPDR Barclays Capital High Yield Bond ETF (
For another option in the high yield bond ETF space, investors
have the ultra-popular JNK, initiated in November 2007. With
assets of $12.6 billion under its management, the fund tracks the
overall performance of the Barclays Capital High Yield Very
Liquid Index, which includes fixed-rate, taxable, low rated
corporate bonds usually 'BBB' and below. The individual bond has
more than $600 million in face value and remaining maturity of at
least one year.
The fund is heavily exposed to the industrial sector and holds
around 225 bonds in its basket (Read:
Three Industrial ETFs Outperforming XLI
). The product has a modified adjusted duration of 4.32 years and
average yield to maturity of 7.60%.
JNK is one of the most liquid funds as it trades in heavy
volume of more than 4.5 million shares a day. The fund delivered
decent returns in the trailing one year period while its 30 day
SEC yield comes in at 5.7%. It is a low cost choice in the high
yield bond space, charging 40 bps in fees per year from
iBoxx $ High Yield Corporate Bond Fund (
The fund, issued by iShares in April 2007, seeks to match the
performance of the iBoxx $ Liquid High Yield Index, before fees
and expenses (Read:
iShares Debuts Two High Yield Bond ETFs
). HYG is the largest bond ETF in the high yield bond space and
holds 623 securities with heavy focus on short and intermediate
About 70% of the product's holdings mature in less than 10
years, giving HYG an effective duration of just 4.1 years and
yield to maturity of 6.69%. In terms of credit quality, the fund
focuses on higher quality non-investment grade bonds, allocating
just 15% of the portfolio to bonds rated 'B' or lower. Instead,
'BB' bonds make up nearly 42% of the portfolio while 'B' rated
securities comprise the rest. These lower rated bonds reduce the
risk of higher defaults. Further, the fund has a solid yield with
the average coupon of 5.7% (Read:
Top Three High Yield Junk Bond ETFs
From a sector look, consumer service makes up about 17% of the
total, while financials and oil & gas sectors comprise
another 12% each of the product. The product has so far attracted
assets worth $16.4 billion and is the most popular and most
liquid ETF in the bond space.
The fund charges fees of 50 bps from investors per year and
trades in heavy volumes of 3.3 million shares, suggesting that it
is a very liquid choice in the space.
PowerShares Fundamental High Yield Corporate Bond
Launched in November 2007, this ETF seeks to replicate the
price and yield of the RAFI High Yield Bond Index, holding 220
securities. The fund holds U.S. bonds registered for sale in the
U.S. that have at least one year until maturity and focus on B to
BBB rated bonds.
The ETF weights securities by a combination of fundamental
factors and puts about 13% of the assets in top 10 holdings
Are The Fundamental Bond ETFs Better Fixed Income
). With total assets of $887.3 million, the fund has a low
effective duration of 4 years and targets only mid-term corporate
Consumer discretionary constitutes the top spot in the basket,
followed by financials and energy (Read:
Play A Consumer Recovery With These Discretionary
). The product yields about 3.9% in 30 Day SEC terms, a
reflection of its lower overall effective duration. It also looks
cheap as it charges 50 bps from investors in fees per year.
However, it is less liquid, which might increase the cost of
investing in the form of a higher bid/ask spread.
Market Vectors High-Yield Muni ETF (
Investors seeking to target an array of municipal bonds from
across the country may find Van Eck product an intriguing option.
Being the nation's first ETF to focus on high-yield munis, this
ETF tracks the Barclays Capital Municipal Custom High Yield
Composite Index and puts 75% in non-investment grade munis while
allocating about 25% to Baa/BBB rated securities as well (Read:
Looking For Income? Try High Yield Muni ETFs
Launched in February 2009, the fund has so far attracted
around $1 billion in assets and holds 259 securities in the
basket. It allocates about 14% securities in top 10 holdings with
heavy focus on industrial revenue and healthcare. These two
sectors comprise the lion's share (70%) of the assets in the
Maturity of the munis is tilted towards the longer period
giving the fund a greater focus on yield and interest rate risk.
As a result, the average modified duration is higher at 10.82
years and yield to maturity is 6.22% (Read:
Forget About Low Rates With These Three Bond
Further, the product is widely spread out across various
states as New York bonds comprise about 8.4% of the fund, while
California bonds make up another 7%. Beyond these two, the rest
of the top five is rounded out by the states of Illinois (6.9%),
Texas (6.9%) and New Jersey (6.1%).
The fund is the low cost choice in the space with an expense
ratio of 0.35%. Trading with volumes of about 300,000, the
product has seen a solid double digit appreciation in the
trailing 12 month period, while its 30 Day SEC yield comes in at
SPDR Nuveen S&P High Yield Municipal Bond ETF
This ETF is the new entrant in the high yield munis bond space
with AUM of $196 million. Launched in April 2011, the fund seeks
to replicate the price and performance of the S&P Municipal
Yield Index, before fees and expenses. Bonds in the fund include
municipal bonds issued by the U.S. states and territories or
local governments or agencies and should be exempt from federal
The Forgotten Municipal Bond ETFs
In terms of credit quality, the fund comprises BBB and lower
rated munis bonds having longer maturities. With holdings of 122
securities, the product has yield to maturity of 5.90% and
modified adjusted duration of 10.32 years.
It is also widely spread in the U.S., with California and
Florida munis comprising 15% and 10%, respectively. The other top
three bonds are from New York, Illinois, and Colorado and
together these make up nearly 23% of the fund.
The product trades in lower volume and charges 45 bps in fees
per year. However, the 30-day SEC yield of 4.0% and tax
equivalent yield of 6.2% could make the fund attractive to yield
hungry investors, especially if tax rates make these investments
even more appealing.
0-5 Year High Yield Corporate Bond Index Fund
This is the first ETF that provides exposure to the short-term
high yield corporates and was initiated by PIMCO in June 2011
PIMCO Files For Three More Active Bond ETFs
). The fund seeks to match the performance of the BofA Merrill
Lynch 0-5 Year US High Yield Constrained Index, holding 217
securities in the basket.
With lower effective duration of 1.7 years and an effective
maturity of just 2.9 years, the product is less volatile than the
broad maturity high yield counterparts. The fund has total assets
of $725 million under its management. It is less liquid, as it
exchanges only 70,000 shares per day.
The product has generated average returns for the trailing one
year period, in line with many other products in the category
Checking In On The PIMCO Total Return ETF
). However, its 30-day SEC yield of 4.1% appeals to investors
seeking current income, while it represents a reasonably priced
choice in the space as it costs 55 basis points a year.
SPDR Barclays Capital Short Term High Yield Bond
Investors looking for short-term exposure to the high yield
space may also look at the State Street's entrant into the space.
Launched in March 2012, this ETF seeks to match the price and
performance of the Barclays Capital US High Yield 350mn Cash Pay
0-5 Yr 2% Capped Index, before fees and expenses.
With holdings of 275 securities in the basket, the fund
consists of corporates having maturity of less than 5 years and
has BB and lower rated bonds. This gives a lower average duration
of 2.17 years and a 30-day SEC yield is 5.1%.
The fund has so far attracted about $550 million assets and
trades in quantities of 230,000 shares per day (Read:
Guide to the 25 Most Liquid ETFs
). It generated modest returns since inception, while it costs
just 40 basis points a year in fees.
Market Vectors Fallen Angel ETF (
This innovative fund debuted in April 2012 in the high yield
bond space (Read:
Van Eck Launches Fallen Angel Bond ETF (ANGL)
). It seeks to replicate the performance of the BofA Merrill
Lynch US Fallen Angel High Yield Index, holding 65 securities in
total. The fund seems to be an interesting choice for investors
as it focuses on 'fallen angel' bonds.
These bonds consist of securities that were once investment
grade but have fallen from grace and are now trading as junk
bonds. Bonds in the underlying index generally consist of BB
and B rated corporates, which together make up for 91% of the
The index is weighted towards industrial bonds with 63% share,
with the biggest allocations in this space going to telecom and
basic industries (Read:
U.S. Telecom ETFs: Opportunities and Threats
). Financials and utilities make up for the remaining portion in
the fund. It has good yield to maturity of 6.38% with modified
duration of 5.48 years.
The ETF pays out a 30 Day SEC yield of about 5.7% while it
charges a low expense ratio of 0.40% like many other ETFs in the
space. It has delivered modest returns since inceptions, and
could be a fresh way to target undervalued and overlooked bonds
in the space.
iShares Baa-Ba Rated Corporate Bond Fund (
Initiated in April 2012, this fund targets the U.S. corporate
high yield bond market with securities of Baa1- Ba3. It seeks to
match the performance of the Barclays Capital U.S. Corporate Baa
- Ba Capped Index, holding 260 securities in the basket.
Since the fund does not have any limitation to maturity, its
average maturity comes in at relatively high 10.03 years.
Compared to many other funds in the space, QLTB has lower yield
to maturity of 3.2% and higher effective duration of 6.6 years,
which raises the interest rate risk.
With AUM of $10.1 million, the product puts more focus on the
industrial sector with 67% share followed by financial
institutions and utilities (Read:
Utility ETFs: Slumping Sector In Rebounding
). This fund is cheap, charging 30 bps in fees per year, but it
has low volume and it has been a bit of an underperformer for
most of 2012.
iShares B-Ca Rated Corporate Bond Fund (
This fund, launched in April 2012, is similar to QLTB. It
comprises B1-Ca rated securities with 126 holdings in total. The
securities in the fund generally have maturities of 5-10 years,
with average maturity of 4.5 years. With low effective duration
of 3.8 years, the product has a relatively low interest rate risk
compared to others on the list (See more ETFs in the
Zacks ETF Center
With AUM of about $10 million, the fund tracks the Barclays
U.S. Corporate B-Ca Capped Index. It gained a bit since inception
and yields a solid 6.4% in 30 Day SEC terms. However, when
compared to QLTB, this fund is quite expensive as it charges 55
bps in fees per year.
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MKT VEC-FA HYB (ANGL): ETF Research Reports
MKT VEC-HY MUNI (HYD): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
PERITUS-HIGH YL (HYLD): ETF Research Reports
SPDR-NU SP HYMB (HYMB): ETF Research Reports
PIMCO-0-5 HY CB (HYS): ETF Research Reports
SPDR-BC HY BD (JNK): ETF Research Reports
PWRSH-FUN HY CP (PHB): ETF Research Reports
ISHARS-BAA BARC (QLTB): ETF Research Reports
ISHARS-B CARP (QLTC): ETF Research Reports
SPDR-BC ST HY B (SJNK): ETF Research Reports
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