Yields, downside protection and fundamentals support case for high-yield corporate bond ETFs

Jun 18th, 2012 | By | Category: Fixed Income

Though a number of high-yield corporate debt ETFs have experienced outflows in recent weeks, most notably SSgA’s SPDR Barclays Capital High Yield Bond ETF (JNK), there are several reasons to favour corporate debt over equities or government debt in the current environment. At least that’s the view of Fran Rodilosso, a high-yield bond portfolio manager at Market Vectors.

Yields, downside protection and fundamentals support case for high-yield corporate bond ETFs

Yields, downside protection and fundamentals support case for high-yield corporate bond ETFs, says Fran Rodilosso, a high-yield bond manager at Market Vectors.

Rodilosso points to a number of factors supporting this view, the primary one being yields. Yields on high-yield corporate bonds currently far exceed those of US Treasuries, UK gilts or German bunds, issuances which Rodilosso says “are not immune to declining values in their own rights.”

Additional factors supporting the veteran portfolio manager’s stance relate to downside protection and credit fundamentals. [High-yield bond ETFs backed by cash-rich corporates]

On downside protection, Rodilosso says that equities have had their yields pushed lower recently and have exhibited greater sensitivity than high-yield credit markets to downward moves in the economy.

For example, although both asset classes performed poorly, global equities, as measured by MSCI EAFE, underperformed global high-yield corporate debt, as measured by BAML Global High Yield Index, by a wide margin in 2008 – the height of the global financial crisis.

On credit fundamentals, Rodilosso’s believes that, in contrast to many government bond markets, the high-yield corporate space is not facing a wall of insurmountable debt over the next two years. “In fact, over the past four years, high-yield borrowers have tended to push their maturities out when the opportunity has arisen. And to the degree institutional investors are re-investing coupons, there appears to be already decent demand for new issuance,” states Rodilosso.

Summing up, Rodilosso notes that, “in looking at the fundamentals, default rates currently remain low, and current spreads more than compensate for default near current rates. In my opinion, companies are generally in a better state than they were five years ago, while developed market governments are not.”

Rodilosso, who has more than 20 years of senior level experience in emerging market, high-yield debt research and portfolio management, currently manages three NYSE-listed high-yield corporate bond ETFs, the Market Vectors Fallen Angel High Yield Bond ETF (ANGL), the Market Vectors International High Yield Bond ETF (IHY) and the most recent addition to this fund family, the Market Vectors Emerging Markets High Yield Bond ETF (HYEM).

For UK-based investors looking to gain exposure to high-yield corporate bonds, there a number of London-listed ETFs to consider (see below). European investors should note that many of these ETFs are cross-listed on European exchanges such as, for example, the Deutsch Boerse (Xetra), Euronext and Borsa Italiana, and/or are registered for sale and distribution in multiple European countries.

US High Yield

Pimco Short-Term High Yield Corporate Bond Index Source ETF (STHY)
The Pimco Short-Term High Yield Corporate Bond Index Source ETF aims to replicate the performance of the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index by investing in a range of securities broadly similar to the constituents of the index. The BofA Merrill Lynch 0-5 Year US High Yield Constrained Index tracks the performance of short-term US dollar-denominated sub-investment-grade corporate debt issued in the US domestic market with less than five years remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million, issued publicly. Allocations to an individual issuer will not exceed 2%. London (LSE) listed, TER 0.55%.

iShares Markit iBoxx $ High Yield Capped Bond ETF (SHYU)
The iShares Markit iBoxx $ High Yield Capped Bond ETF tracks the Markit iBoxx USD Liquid High Yield Capped Index. This index consists of the most liquid US dollar-denominated corporate bonds with a sub-investment-grade rating, while maintaining a focus on UCITs eligibility. The maximum original time to maturity is 15 years and the minimum time to maturity is three and a half years for new bonds to be included and three years for bonds that already exist in the index. For diversification purposes the weight of each issuer in the index is capped at 3%. London (LSE) listed, TER 0.50%.

European High Yield

SPDR Barclays Capital Euro High Yield Bond ETF (SYBJ)
The SPDR Barclays Capital Euro High Yield Bond ETF tracks the Barclays Capital Liquidity Screened Euro High Yield Bond Index. This index includes fixed-rate bullet, puttable, and callable senior debt publicly issued in the Eurobond and index-member domestic markets. The maturity must be between one and up to (but not including) 15 years, and fixed-to-floating rate securities will not be included. The principal and coupons must be denominated in EUR and have a minimum par amount outstanding of €250 million. London (LSE) listed, TER 0.45%.

iShares Markit iBoxx Euro High Yield Bond ETF (IHYG)
The iShares Markit iBoxx Euro High Yield Bond ETF tracks the Markit iBoxx Euro Liquid High Yield Index. This index offers exposure to the largest and most liquid euro-denominated corporate bonds with sub-investment grade rating. Only bonds with a minimum amount outstanding of €250 million are included in the index. The maximum original time to maturity is 10.5 years and the minimum time to maturity is 2 years for new bonds to be included (no minimum restriction for bonds already in the index). For diversification purposes the weight of each issuer in the index is capped at 5%. London (LSE) listed, TER 0.50%.

Lyxor ETF iBoxx EUR Liquid High Yield 30 (YIEL)
The Lyxor ETF iBoxx EUR Liquid High Yield 30 ETF tracks the Markit iBoxx EUR Liquid High Yield 30 Total Return Index. This includes 30 of the most liquid bonds making up the Markit iBoxx EUR High Yield Core Cum Crossover index, representing the scope of high-yield, euro-denominated non-government bonds. London (LSE) listed, TER 0.45%.

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