Fixed Income: U.S. - Corporate High Yield Short-Term
As investors continue their hunt for yield, the US short-term high yield segment continues to attract assets. Two broad-market funds have over $1B in AUM each. Despite the growth of the
“HYS is the largest and most liquid fund” segment, institutional liquidity is relatively weak here, so block trades will need to be worked hard with liquidity providers.
HYS is one of the two largest and most liquid funds in the segment, but it also has the segment's highest cost (55 bps) by a fairly wide margin. For that elevated cost, you get a neutral take on the market with significant variability in tracking.
Despite entering the segment later than HYS, SJNK has attracted almost $4B in AUM on the back of a segment-low expense ratio. However, the fund has struggled on a median basis to track its index over the past 24 months, but it Fits the market best—it tracks our benchmark. Despite its struggle in tracking, SJNK is our Analyst Pick because its liquidity, low fees and market-like exposure.
Guggenheim's BulletShares suite–target-date funds–aims to provide investors with a specific maturity date. BSJF, BSJG and BSJH are scheduled to mature in December of 2015, 2016 and 2017, respectively. They appear to be on course with their planned path.
SHYG, HYZD and HYND were launched in the last quarter of 2013. SHYG is the shorter-term sister of iShares' HYG. HYZD and HYND by WisdomTree track essentially the same index as HYS in their long portfolios but overlaid with interest rate-hedging strategies. HYZD and HYND offer investors options to maintain overall short-term high yield exposure while reducing their portfolio duration. (Insight updated 11/22/17)
All Funds (9)
SHYG $3.62 B 3623854200 Lower YTM
SJNK $4.27 B 4273457410.8 Marketlike
HYS $1.55 B 1551088000 Highly liquid
BSJJ $914.06 M 914062500 Matures in 2019
HYZD $84.05 M 84054950 Credit risk only
BSJI $1.07 B 1072966200 Matures in 2018
HYND $14.48 M 14476140 Significant Duration Risk
SFHY $5.06 M 5055240 N/A
BSJF $450.45 M 450450000 Matures in 2015
ETF.com Grade as 11/16/17
Fixed Income: U.S. - Corporate High Yield Short-Term
ETF.com Efficiency Insight
No broad market fund scores particularly well here, highlighting the challenge of effectively optimizing passive junk bond portfolios, especially since the underlying market is generally
“No fund scores particularly well here” illiquid and volatile.
Despite having the segment's highest expense ratio (55 bps), HYS scores among the highest in Efficiency in the segment. It also beat SJNK in tracking performance on a median basis but both have shown more tracking volatility than we would like. Tracking volatilities are rather common in the high yield market, largely due to portfolio optimization and liquidity constraints in the underlying market.
SJNK charges the lowest headline expense ratio. However, its "low" expense ratio has not helped its tracking performance. The fund has lagged its index by more than twice its expense ratio over most rolling 12-month periods over the past 2 years.
Two newer funds—HYZD and HYND—have yet to accumulate enough data for a full tracking performance evaluation. Nonetheless, we expect similar struggles in tracking their respective indexes.
As assets grow, all three target date funds have improved their tracking significantly. They are on track to be unwound on their planned liquidation dates.
HYZD and—in particular—HYND haven't gathered enough assets to ensure their future viability. All other funds in the segment have sufficient asset bases to ensure a low likelihood of closure for any reason other than planned liquidations. (Insight updated 11/22/17)
ETF.com Tradability Insight
Except for the two newest funds (HYZD and HYND), retail investors can trade all short-term junk bond funds with relative ease. SJNK and HYS, the two largest offerings, attract at least $30M
“high yield market is illiquid in general” each in daily volume with very tight spreads.
BSJF, BSJG and BSJH—target-date funds—typically see steady volumes and manageable spreads. Furthermore, buy and hold investors purchasing them effectively cut their already muted spreads in half by holding to maturity.
SHYG is also accessible at reasonable spreads for retail investors using limit orders.
Since the high yield market is illiquid in general, multiple creations/redemptions will likely move the prices of underlying securities against you. In short, work with a liquidity provider, but don't expect a bargain on execution costs. (Insight updated 11/22/17)
ETF.com Fit Insight
[Insight as of 11/28/14] The segment can be broken down into three general groups of exposure: Broad market short-term, target-date, and duration-hedged.
SJNK is the standout in Fit,
“SJNK is the standout in Fit” registering a near-perfect score thanks to the fund tracking the same index as our benchmark. SJNK mirrors our benchmark across all maturity buckets, with roughly 2/3 of the portfolio maturing 3-5 years from now and about 1/4 of the portfolio in bonds expiring in 1-3 years. HYS leans toward the shorter term, over 40% of the portfolio will mature in less than 3 years.
Whereas SJNK and HYS attempt to provide perpetual exposure to the broad short-term, high-yield market, BSJF, BSJG and BSJH aim to provide targeted exposure consistent with their target date mandate. They behave more like individual bonds rather than typical bond funds. As time passes, their maturities and durations will decline until their planned liquidation dates.
HYZD and HYND were launched as part of the rate-hedged suite by WisdomTree. Their long portfolios track essentially the same index as HYS but overlaid with an interest rate hedging strategy through Treasury futures. HYZD aims for net duration of zero with the intent of capturing only the credit spread while minimizing duration risk. On the other hand, HYND aims for a net duration of -7 years. Investors can add HYND to their core high yield holdings to shorten up duration without substantially altering underlying credit and sector exposures. (Insight updated 11/22/17)