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Junk Bond ETFs: Support from Managers Playing Catch Up?

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Junk bond exchange traded funds may still have legs as underperforming active managers help support prices.

Speculative-grade, junk bonds have rallied off the February lows as some saw default risks, notably those associated with the energy sector, dissipate in light of rising crude oil prices . Year-to-date, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK ) gained 4.5% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG ) rose 4.4%.

However, Goldman Sachs pointed out that 90% of actively managed high-yield debt funds have failed to meet or surpass their benchmarks this year, reports Tracy Alloway for Bloomberg.

Related: High Quality Junk Bond ETFs Limit Default Risk

Active bond managers exited the market after speculative-grade debt tanked at the end of last year, but the asset category staged an impressive rally in March and April, causing many to miss out on the rebound.

"Key to the underperformance was the defensive positioning of high-yield funds heading into the year, maintaining high cash balances and low conviction as oil, recession, and redemption fears pulsated through the credit markets. However, the defensive strategy left funds underinvested when the high-yield and oil market sharply turned a corner in tandem in mid-February," Goldman's Bridget Bartlett wrote in a research note.

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Moreover, Bartlett argued that the dearth of new bond issues from riskier companies has exacerbated the difficult trading environment, hindering bond investors' ability to keep pace with the sudden reversal in debt markets.

"As funds play catch-up to their benchmarks, bond managers are more incentivized to step down the quality spectrum to find alpha [outperformance]," Bartlett said. "We believe this will intensify the 'search for yield' that has already been set in motion by easy global monetary policy."

Consequently, now that active junk bond fund managers are underperforming the market, more may be forced to take on riskier, higher-yielding debt.

Related: ETF Investors Grow Wary of Junk Bond Rally

"We think the underperformance of high-yield funds will likely accelerate the next phase of the search for yield trend with investors stepping down the high-yield quality spectrum, into B- and CCC-rated bonds to find alpha," Bartlett added.

The ongoing search for yield among more junkier speculative-grade debt could help support the related ETFs. For instance, HYG holds 0.4% BBB-rated debt, 50.8% BB, 36.7% B, 11.5% CCC, 0.8% CC and 0.01% C. JNK includes BB 42.5%, B 41.4% and CCC or lower 16.0%.

For more information on the Junk Bond ETF market, visit our Junk Bonds category .

iShares iBoxx $ High Yield Corporate Bond ETF

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article was provided by our partner Tom Lydon of etftrends.com.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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