Investors have piled out of high-yield bond ETFs after a slight downturn in performance and analysts’ warnings of a rally in this asset class that was bordering on “euphoria”.
Earlier in the month, fuelled by rallying equity and junk bond prices, investors had been snapping up riskier corporate debt. Sales of high-yield bonds have risen by more than three times in the US compared to last year, as reported by The Financial Times.
High-yield January turnaround
But in recent days, high yield bond ETFs, which track a selection of issuances in the market, have lost more than $2 billion as average performance has slipped to minus 0.92%, dropping from its early January high of plus 1.12%.
This trend has not affected investment grade bonds, which are less risky, in the same way. Although this asset class’s average performance is down even further so far this year at minus 2.1%, accumulated flows are positive so far this year at around $6.7 billion.
Despite moves in markets, passive funds tracking the high-yield bond market in euros and US dollars have market share of 15% and 11% respectively, found Morningstar, and the asset class is generally gaining in popularity.
High-yield ETF options
Two top players are the iShares € High Yield Corporate Bond ETF (IHYG) and the iShares $ High Yield Corporate Bond ETF (HYG). They charge between 0.50% and 0.55% in fees. Both funds, with a combined $20 billion in assets, have made positive returns so far this year but have seen outflows.
More than 200 ETFs were launched in the US alone last year and more fixed income products are bound to be brought to market in 2018.
For example, Deutsche has recently launched three USD high-yield bond ETFs on the New York Stock Exchange. They cost between 0.20% and 0.35% – cheaper than the market leading products. Fiona Bassett, Deutsche AM’s Head of Passive Asset Management, Americas, explained: “In today’s low interest rate environment, fixed income investors are looking for new sources of yield.”