Fixed Income: U.S. - Corporate High Yield
The U.S. Corporate High Yield Fixed Income segment offers a wide array of choices; each offers a different spin on the market. The two leading ETFs by assets—JNK and HYG—aim to
“The portfolios all look different.” provide broad, plain vanilla exposure, but still differ significantly from our benchmark due to their respective liquidity screens. Other ETFs apply less stringent liquidity screens, but slice the market up in different ways. QLTC only holds lower-quality bonds (those rated B or below). PHB screens and weights its portfolio based on the strength of issuer fundamentals. ANGL only holds bonds that were downgraded to high yield from investment grade. THHY, HYHG, and HYGH aim to capture only the credit spread while hedging out duration risk. Last but not the least, HYLD is an actively managed fund that aims to beat, rather than mimic, the market.
As a result, the portfolios all look different. Yields range from THHY's 4.7% to QLTC's 7.0%, and credit ratings similarly range from PHB's BB- down to QLTC's B-. The most popular funds in the segment, HYG and JNK, both have weighted average B credit ratings, and yields of 6% or more. ANGL searches for yield by taking on more interest rate risk, reflected by its average duration—the segment's highest. THHY, HYHG, and HYGH forgo some yields to achieve duration-hedged portfolios.
Expense ratios in the segment range from JNK and ANGL's 40 bps to HYLD's 118 bps, with most of the funds charging between 40 and 55 bps. HYG and JNK are by far the most liquid funds in the segment, but HYG is the best fund from an all-in costs perspective due to its superior liquidity and tracking prowess. HYLD's market has matured rapidly, so access through retail trades should be easy and fair. PHB also possesses reasonable liquidity. However, ANGL, QLTC and QLTB are likely to be difficult to trade at fair prices. (Insight updated 11/22/17)
All Funds (19)
HYG $18.61 B 18612500680 Most liquid
JNK $11.91 B 11910709294.691 Highly liquid
ANGL $1.15 B 1150222022.15 Downgraded bonds
JPHY $45.94 M 45936000 N/A
PHB $1.12 B 1123379200 Fundamentals-based
HYHG $143.23 M 143225000 Duration-hedged
HYGH $136.29 M 136287300 Long HYG, short Treasuries
FALN $17.76 M 17759170 N/A
HYXE $10.23 M 10227880 N/A
HYIH $10.4 M 10397273.105 Interest Rate Hedged
HYLB $338.92 M 338919550.585 N/A
HYLD $157.5 M 157495197 Actively managed and expensive
HYLV $105.52 M 105520825.124 N/A
HYDB $10.08 M 10075600 N/A
GHYB $52.25 M 52248000 N/A
USHY $64.5 M 64497940 N/A
WFHY $5.18 M 5175330 N/A
THHY $4.76 M 4759631 Thin Volume
QLTC $11.67 M 11669025 Higher credit risk, higher yield
ETF.com Grade as 11/16/17
Fixed Income: U.S. - Corporate High Yield
ETF.com Efficiency Insight
Corporate high-yield bond funds charge a wide range of fees. JNK and ANGL charge a segment-leading 40 bps, while all but one of the remaining funds charges between 50 and 55 bps. At the
“HYG is in a league of its own” other end of the spectrum, HYLD charges a whopping 118 bps for its actively managed strategy.
However, a fund's ability to track its underlying index is a better indicator of true holding costs than its stated expense ratio. In that respect, HYG is in a league of its own. Despite its 50 bp expense ratio, it tracks its underlying index consistently well. It has, in fact, consistently clawed back much if not all of its expense ratio. In contrast, most of the other funds struggle in tracking their indexes consistently. Their median tracking errors are typically of multiples of their stated expense ratios. Since HYLD doesn't track an index, tracking is not an issue. However, its high fees will eat into investors' returns.
This segment is home to four popular ETFs—HYG, JNK, HYLD and PHB. HYG leads the group, with over $10B, and JNK isn't far behind. PHB and HYLD are a step down, with about $500M each—still a very respectable amount which points to fund stability. While HYHG and HYGH don't have stellar asset levels, their AUMs are large enough to ward off closure risk. By comparison, the three remaining ETFs all have less than $50M in AUM. These low asset levels put these funds at risk of getting shut down. (Insight updated 11/22/17)
ETF.com Tradability Insight
HYG leads the segment in liquidity, with its median daily volume over $500M and 1 bp average spread. However, it is far from the only liquid fund here. JNK comes in at close second, with a
“HYG leads the segment in liquidity” median daily volume around $300M and narrow spreads. PHB and HYLD are two other reasonably liquid choices, with median daily volumes over $5M and reasonable spreads.
HYHG, THHY, and HYGH are the duration hedged ETFs in the segment. However, HYHG is the only one with significant retail volume. HYGH can be traded in smaller amounts with some care. On the other hand, THHY require great care to trade in-and-out. Limit orders are a must for all three funds.
ANGL and QLTC are very difficult to trade. Both trade less than $150K most days with prohibitively wide spreads. Large investors are likely to get a better price with the assistance of a market maker. Use caution trading these funds in any size short of a full creation unit.
Since the high yield market has poor underlying liquidity in general, multiple creations/redemptions can move the prices of underlying securities against you. Be sure to work with market makers or call up issuers' capital market desks for best execution for large orders. (Insight updated 11/22/17)
ETF.com Fit Insight
[Insight as of 11/28/14] None of the funds in this segment perfectly captures the broad corporate high-yield debt market, for understandable reasons. After all, it's a market with poor
“None of the funds in this segment perfectly captures the market” liquidity. As such, many high yield indexes have built-in liquidity-friendly selection criteria which would take the indexes away from unconstrained market exposure. Additionally, most funds heavily optimize their portfolio out of necessity. The two funds, JNK and HYG, that try to capture the broad market implement stringent liquidity screens that prevent them from capturing the entire market. PHB also has a broad focus, but it only holds bonds from issuers with strong fundamentals, and weights those bonds based on issuer strength.
These three funds don't look much like each other, or like our benchmark. JNK overweights industrial debt and has the highest yield of the three. HYG has a slightly lower yield and shorter duration. The surprise here is PHB: Despite an elevated duration, it yields less than 6% thanks to a heavier allocation to higher-quality bonds.
The remaining funds all purposely tilt away from the market. QLTC only holds lower-quality bonds rated B and below. ANGL only holds bonds whose issuers fell from investment-grade to high-yield status, and HYLD actively tries to beat the market through active security selection. THHY, HYHG, and HYGH aim to capture only the credit spreads while hedging out duration risk by shorting Treasury futures.
Again, these different selection mechanisms result in very different portfolios. QLTC's weighted average credit rating and effective duration are both at the low-end of the segment. Despite having the longest effective duration, ANGL's yield is far from impressive in the context of this segment, due largely to its elevated credit quality. THHY, HYGH and HYHG are all reasonably close to their target of net zero duration.
HYLD is the moving target among its peers, as its actively managed portfolio ebbs and flows with the preferences of its manager, Peritus. According to the issuer, the current iteration of the portfolio has the lowest interest rate risk in the segment but generates the highest YTM. (Insight updated 11/22/17)