Lingering economic conditions and still high unemployment rates
are weighing on domestic equity markets. The market chaos is
compelling investors to look for other investments beyond equities.
At present, fixed-income markets, high yield bonds in particular,
The global high yield bond ETF market has grown to a
multi-billion dollar segment. While part of this reason is due to
high yields and low default rates, outperformance on a broader
perspective is also a key reason as well (Read:
Seven Biggest Bond ETFs By Assets Under
These trends have been especially important due to anemic stock
returns and low yields from traditional investments. Broad equity
indexes have remained flat, while ten year Treasury bonds remain
depressed below 2%, well under their historical averages.
Furthermore, although default rates are expected to rise, many
are looking for just a modest increase in defaults, but one that is
still below the long-term average of 4%. Given this and the
likelihood of low rates for the near future, it could be a very
interesting time to make a play on the high yield bond ETF
These bond ETFs also often cost investors less in fees than
their mutual fund counterparts while also allowing for better
control of tax issues. Additionally, the greater trading
flexibility and transparency of the ETF structure helps to give
investors a better picture of the investing landscape and could cut
down on risk and volatility when compared to single issues of high
yield bonds (read:
Three Impressive High Yield Junk Bond ETFs
While there are a number of options in this segment, we have
taken a closer look at four of our favorite domestic high yield
bond ETFs below. In a low rate environment, these funds could
provide investors with income potential and relatively stable
returns while remaining low correlated assets. With these benefits
in focus, any of the following funds could be interesting picks for
investors seeking to make a play on this market corner at this
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 that invests in a focused portfolio of high yield debt
securities, which include senior and subordinated corporate debt
obligations (such as bonds, debentures, notes and commercial paper)
Having total assets of $91.3 million in its portfolio, the
product does not have any limitation on maturity and includes
short-term, medium-term and long-term maturities. It also looks to
avoid new issues of debt while it also has the ability to cycle
into U.S. T-Bills when the high yield market is crumbling.
The fund represents the junk corporate bonds with the lower
effective duration of roughly 3.32 years, higher average yield to
maturity of 10.81% and higher average coupon rate of 9.85%. In
terms of credit quality, HYLD focuses on low-investment grade bonds
(B+ and lower) and holds about 37 securities.
The ETF is widely diversified across sectors. Healthcare bonds
take 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 shown a nice run-up in its prices this year,
surging about 3.7% year-to-date. However, in the past one year
period, the fund is flat from a capital gains perspective.
Nevertheless, the fund charges fees of 1.35% per year, which looks
expensive, and has a higher 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 $11.1 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.
With lower fees of 40 bps per year, the fund is heavily exposed
to the industrial sector and holds around 228 bonds in its basket.
The product has an average duration of 4.56 years and average yield
to maturity of 7.87%. (Read:
iShares Debuts Two High Yield Bond ETFs
JNK provides an attractive dividend yield of 6.35%, much like
other high yield junk bond ETFs. It has generated annual returns of
3.9% in the last one-year period from a capital gains look.
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. The product holds 601 junk bonds with heavy focus on
short and intermediate term corporates.
With an effective duration of 4.28 years and average yield to
maturity of 7.14%, the product has an attractive coupon rate of
7.95%. In terms of credit quality, it focuses on lower grade bonds
that have ratings of 'BBB' and lower.
Consumer service, financials, and oil & gas constitute the
large part of the fund's assets with Blackrock notes on top,
followed by Sprint Nextel's notes due in 2018 and Citigroup notes
due in 2017. (See more ETFs in the
Zacks ETF Center
This ETF with AUM of $14.6 billion is cheap, charging only 50
bps a year in fees. HYG delivers a huge dividend of 5.53% per annum
and excellent annual returns of 5.5% over the past one year
PowerShares Fundamental High Yield Corporate Bond
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.
Unlike other products in the space, this ETF weights securities
by a combination of fundamental factors (Read:
Are the Fundamental Bond ETFs Better Fixed Income
). With total assets of $937.6 million, the fund has a low
effective duration of 3.98 years and targets only mid-term
corporate bonds. The average yield to maturity and average coupon
rate is 5.60% and 7.51%, respectively.
Consumer discretionary constitutes the top spot in the basket,
followed by energy and financials. The product is light on
utilities and information technology (Read:
Utility ETFs: Slumping Sector in Rebounding
). PHB yields 5.46% per annum and delivered an impressive 5.7%
annual return over the last year. It also looks cheap as it charges
only 50 bps in fees a year, which isn't the lowest but is at a very
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ISHARS-IBX HYCB (HYG): ETF Research Reports
PERITUS-HIGH YL (HYLD): ETF Research Reports
SPDR-BC HY BD (JNK): ETF Research Reports
PWRSH-FUN HY CP (PHB): ETF Research Reports
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