iShares Junk Bond ETFs Go Live On BATS

April 03, 2012

iShares stands by BATS with the rollout of two new bond ETFs.

iShares, the world’s largest purveyor of ETFs, today launched two high-yield bond ETFs—one focused on developed markets corporates and the other a blended emerging market debt fund. It’s going head-to-head with Van Eck, which rolled out its own first-of-a-kind version of an international junk bond ETF this morning.

First-to-market funds usually fare better in asset-gathering, but the simultaneous arrivals of the iShares Global ex USD High Yield Corporate Bond Fund (BATS: HYXU) on the BATS exchange and the Market Vectors International High Yield Bond ETF (NYSEArca: IHY) on NYSE Arca this morning clouds that a bit. Both Van Eck’s IHY and iShares’ HYXU come with a price tag of 0.40 percent. As recently as last Thursday, iShares said in regulatory paperwork that it was going to charge 0.55 percent for HYXU.

iShares also launched the iShares Emerging Markets High Yield Bond Fund (BATS: EMHY), which is a portfolio comprising below-investment-grade sovereign and corporate debt in a mix that’s rebalanced monthly. EMHY costs 0.65 percent.

High-yield bond funds focused on non-U.S. debt are still relatively rare, but the segment is gathering steam, especially as investors look for sources of income in a market environment of ultra-low interest rates throughout much of the developed world since markets collapsed in 2008.

International corporate junk debt looms as a particularly prospective investment idea. That’s thanks in part to growth of debt issuance by companies from around the world as a way to substitute bank lending, which has nearly dried up since the credit crisis of 2008.

Both iShares’ HYXU and Market Vectors’ IHY tap into the international high-yield corporate debt space but, to be fair, iShares’ HYXU offers a narrower focus. The iShares ETF excludes not only exposure to corporates in emerging markets, but also to U.S. dollar-denominated bonds, two things that investors will find in IHY.

The iShares fund, which tracks the Markit iBoxx Global Developed Markets ex-US High Yield Index, consists of corporate debt from developed-market companies issued in euros, British pounds and Canadian dollars. It comes to market with a weighted average coupon of 7.82 percent and a yield to maturity of 8.12 percent, according to data on iShares’ website.

Emerging Market Play

EMHY joins a group of other emerging market debt-focused funds, including iShares’ own “LEMB,” which is a local-currency emerging market bond ETF.

The newcomer tracks a Morningstar index that consists of dollar-denominated junk sovereign and corporate debt in the region picked through a rules-based screen that looks for issue size, bond type, maturity and liquidity, iShares said on its website.

EMHY canvasses Latin America, Eastern Europe, the Middle East and Africa as well as Asia ex- Japan for securities with a minimum outstanding face value of $500 million from issuers with an aggregate outstanding debt of at least $1 billion. The fixed-rate securities must also have at least 13 months remaining to maturity.

To ensure liquidity, the strategy also limits single-issue exposure to 23 percent of the portfolio, and issues that are weighted more than 5 percent cannot add up to more than 48 percent of the total mix.

iShares Shows Faith In BATS

iShares remains the only ETF firm to have listed funds on BATS—the company now has eleven ETFs on the Kansas-City, Mo.-based exchange—and it plans at least two more.

BATS has been trying to steal market share from rivals NYSE and Nasdaq, but the exchange suffered in late March from a computer-caused glitch that sent its share price temporarily down to pennies and caused it to cancel its planned initial public offering.

The fiasco even led BATS to strip its Chief Executive Officer Joe Ratterman of his title as chairman.

Still, iShares has stood by its plans to list on BATS and has another two debt funds currently in registration for listing on that exchange.



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