The junk bond ETF space is dominated by two ETFs: The iShares
iBoxx $ High Yield Corporate Bond ETF (NYSE:
) and the the SPDR Barclays Capital High Yield Bond ETF (NYSE:
). Combined, those two ETFs had almost $25 billion in assets
under management as of the close of markets on June 21.
With investors' thirst for yield increasing, the dominance of
HYG and JNK in the high-yield bond space has not served as a
deterrent to ETF sponsors looking to introduce new junk bond
funds. Rather, the success
of those ETFs has prompted a spate of new
high-yield bond fund introductions this year
Among the rookie crop of junk bond ETFs is the iShares B - Ca
Rated Corporate Bond Fund (BATS: QLTC), which debuted in late
April. Indicating that investor interest in junk bond funds is
still robust, the iShares B - Ca Rated Corporate Bond Fund joins
a decent-sized line of new high-yield funds that
are doing well in terms of attracting AUM
. Just two months on the market and QLTC has nearly $10 million
QLTC, which charges an annual expense ratio of 0.55%, is not
entirely true to its name as roughly a third of the fund's
holdings are rated higher than B by Standard & Poor's. In
fact, QLTC's top holding is rated AA+ by S&P. That said, the
rest of the fund is rated BB+, S&P's highest non-investment
grade rating, or lower.
S&P ratings of B, B+ and B- imply a highly speculative
issue and there is where over 61 percent of QLTC's holdings are
classified. Drop into the CCC+, CCC ares or lower, and investors
are looking at issues that carry substantial risks and are
considered extremely speculative. About 18% of QLTC's holdings
are rated CCC+, CCC or CCC-.
QLTC has a weighted average maturity of 5.22 years, which is
slightly above HYG's 4.92 years, but below JNK's 6.87 years. The
new iShares offering, which is currently home to 125 issues,
features an effective duration of 3.96 and a weighted average
coupon of 8.15%. Communications, consumer non-cyclical, consumer
cyclical and technology are the sectors featured most prominently
in QLCT, combining for about 60% of the fund's weight.
The allure of QLTC, as is the case with any high-yield bond
fund, is that high yield. QLTC obliges with a 30-day SEC yield of
7.71 percent and a distribution yield of 6.88%. That gives QLTC a
30-day SEC yield that is nearly 50 basis points higher than JNK's
and a distribution that is 43 basis points below HYG's.
Then again, investors might want to focus more on yield to
maturity. Yield to maturity is the discount rate that equates the
present value of a bond's cash flows with its market price,
according to iShares.
As Peter Tchir
founder of TF Market Advisors
recently said in an interview with Benzinga "I would like to see
regulators focus on making sure yield to call or yield to
maturity is done accurately and highlighted, because investors
seem to focus on the dividend yield, but in reality, expected
return should be based on yield to call rather than dividend
yield as the pull to par effect is real for an ETF holder."
QLTC has a yield to maturity of 7.82%, slight above JNK's, but
nearly 100 basis points of above HYG's.
Tracking error is another issue to consider with junk bond
ETFs. Given the decline in liquidity in the high-yield debt
market, it has become harder for fund managers to own all of an
index's securities. JNK has a tracking error of 0.38%
according to XTF data
iShares data indicate QLTC's tracking error has
been just 0.05%
QLTC's short lifespan makes it difficult to comment on whether
this is a "good" or "bad" ETF, but the bottom line is investors'
willingness to incur risk in search of yield will determine this
For more on junk bond ETFs, click
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