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Watch Out for High Yield Bond ETFs Ahead

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The high-yield bond market has been troubled lately by the double whammy of the oil price collapse and the Fed lift-off slated this month after almost a decade. As a result, the high-yield or junk bond ETFs space is deep in red this year after delivering a dull performance last year. The downturn is more acute this time around than what we saw in the taper-trodden 2013. The prices of these bonds are now at the four-year low level.

The fact that the U.S. energy companies are closely tied to the high-yield bond market, with the former making up about 15% of junk bond issuance, has been blamed for the massacre, as per CNBC . Thus, fears of their default amid the oil price rout triggered the junk bonds sell-off (read: Junk Bond ETFs--Unfortunate Victims of the Oil Crash? ).

Now that oil price is rumored to slip to $20 after OPEC's decision of no production cut in its latest meeting, no near-term recovery is on the horizon. Consequently, default risk has piled up on the junk bonds and the related ETF territory. As per Moody's , energy is the actual culprit of the latest liquidity stress as the sector caused 5 out of the 12 U.S. corporate defaults in the third quarter (read: November ETF Asset Report ).

Moody's foresees persistent liquidity deterioration in energy. Not only this, Moody's went on to comment that muted issuance and widening high-yield spreads hint at the rise in the U.S. speculative-grade default rate. The agency projects that this metric will soar to a five-year high of 3.8% in September 2016 from the present 2.5%. According to the ratings agency S&P, the default rate is likely to soar to 3.3% by next September.

Moreover, the Fed is due for a rate hike this month (most probably). The exit from the rock-bottom interest rate policy would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds.

If this is not enough, junk bonds are often considered equivalent to stocks. As the U.S. stocks are expected to remain muted next year on Fed policy tightening and investors are likely to embrace low volatile products, junk bonds might start to lose popularity. As per industry experts, hazards in the overall commodity space on a stronger greenback cascade into other asset-backed junk bonds on a general risk revulsion.

Below we highlight a few junk bond ETFs that were heavily crushed in recent sessions (see all Junk Bonds ETFs here).

Peritus High Yield ETF's (HYLD)

This $218.6-million active junk bond ETF looks to provide high currency income with a secondary goal of capital appreciation by picking securities with a value-based approach. HYLD looks to have these levels in excess of those found in the Barclays U.S. High Yield Index, which is viewed as a benchmark of the U.S. fixed rate universe, non investment grade debt.

The 88-holdings fund is off over 12% in the year-to-date frame (as of December 9, 2015) and yields about 11.07% annually.

SPDR Barclays High Yield Bond (JNK)

The $10.7-billion fund invests heavily in the industrials sector holds about 790 securities. The bonds included are non-investment grade, fixed-rate, taxable corporate bonds. The fund has an average maturity of 6.14 years and modified adjusted duration of 4.41 years. The fund has lost 10.6% so far this year (as of December 9, 2015) and yields about 6.36% annually.

High Yield Interest Rate Hedged ETF (HYHG)

This $100.3-million high yield bond ETF tracks the U.S. dollar-denominated index that measures the performance of high yield debt issued by corporations domiciled in the U.S. or Canada. The index consists of a long position in high yield bonds and a duration-matched short position in U.S. per CNBC . Treasury securities. The product charges 50 bps in fees and is down over 13% so far this year (as of December 9, 2015) (read: 5 Ways to Play Rising Rates with Hedged & Inverse ETFs ).

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PERITUS-HIGH YL (HYLD): ETF Research Reports

SPDR-BC HY BD (JNK): ETF Research Reports

PRO-HI YLD IRH (HYHG): ETF Research Reports

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


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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