Rising interest rates have, predictably, imperiled various
corners of the bond market and scores of bond ETFs.
Soaring Treasury yields have prompted billions in outflows
from ETFs that hold U.S. government debt, particularly longer
Substantial outflows have been seen from U.S. high-yield bond
funds and investment-grade corporate bond ETFs have offered
little shelter from the storm. Emerging markets bond ETFs
been trounced on tapering chatter
and diminishing risk appetite in the fixed income space.
While all signs point to current environment being a tricky
one to navigate for bond investors, some compelling opportunities
remain among bond ETFs for those with an appetite for risk and a
thirst for yield.
"While BBB and BB bonds are only one level apart in terms of
credit rating, they have very different yield characteristics.
For the 12 months ended July 2013, spreads above the five-year
treasury yield ranged from 160 to 216 basis points (bps) for BBB
rated bonds and ranged from 256 to 421 bps for BB rated bonds,"
according to S&P Global Fixed Income Research.
In a new research note, S&P Capital IQ points out that
investors are demand higher yields to be involved with bonds that
are rated at the higher end of the junk spectrum.
Nifty New Bond ETF Has Low Duration, High
"The most common way for a bond to drop from investment grade
to speculative, also known as becoming a falling angel, is to be
downgraded one notch from BBB- to BB+. Through August 8 of this
year, there were 17 U.S. companies that fell to speculative grade
in Standard & Poor's Ratings, 13 of them have fallen one
notch. Meanwhile, in the other four instances, the credit ratings
fell multiple notches," said S&P Capital IQ in the note.
Investors can access fallen angel bonds with the Market
Vectors Fallen Angel High Yield Bond ETF (NYSE:
). Nearly two-thirds of ANGL's holdings are rated BB and over 48
percent of the fund has maturities ranging from one to five
Fallen angel bonds offer some benefits to investors that are
often overlooked. First,
these bonds have better credit profiles
than traditional junk bonds because fallen angels once had
investment-grade ratings. As such, fallen angels have lower
default and offer the potential for robust capital appreciation
because they earn promotions back to investment-grade status more
often than bonds that were born as junk. ANGL has a 30-day SEC
yield of 5.14 percent.
Another option for investors looking to explore bonds with "B"
ratings is the iShares Baa - Ba Rated Corporate Bond ETF (NYSE:
). Over 64 percent of QLTB's 372 holdings are rated BBB+, BBB or
BBB-, so this is not a pure junk bond ETF. That is reflected in
the 12-month trailing yield of 3.61 percent, 286 basis points
below that of the iShares iBoxx $ High Yield Corporate Bond ETF
), the largest junk bond ETF.
QLTB, which was rated Marketweight by S&P Capital IQ, has
an effective duration of 6.19 years and annual fees of 0.3
percent. Top-10 holdings include issues from Ford (NYSE:
), Citigroup (NYSE:
) and American International Group (NYSE:
The SPDR BofA Merrill Lynch Crossover Corporate Bond ETF
) also goes overlooked for the simple reason that some investors
do not know exactly what a crossover bond is.
"Crossover" corporate debt generally means corporate debt
rated at levels where the lower end of investment grade debt and
the higher end of high yield debt meet. Qualifying securities
must be rated BBB1 through BB3, inclusive (based on an average of
Moody's, S&P and Fitch). Qualifying securities must have at
least one year remaining term to maturity, a fixed coupon
schedule and a minimum amount outstanding of $250 million,"
according to State Street
XOVR, also rated Marketweight by S&P Capital IQ, has lost
5.7 percent since May 22 when Federal Reserve tapering chatter
started in earnest. The fund's modified adjusted duration is
almost 5.6 years, which is well below that of the largest
investment-grade corporate bond ETF. XOVR's current yield is 5.3
percent with an average yield to worst of 4.36 percent. Yield to
worst is a measure of the lowest possible yield an investor can
garner without the issuer defaulting.
For more on ETFs, click
Disclosure: Author owns none of the securities mentioned
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Free Trading Education -
Check out the free events taking place on Marketfy
this week. Spaces are limited. Sign up today.