Junk Bond ETF Outflows Grow

June 11, 2012

It’s been a banner year for junk-bond ETFs as yield-hungry investors have sought bigger returns than the meager rates on more highly rated debt. But the ground may be shifting now.

Junk bond ETFs have gained $5.5 billion in 2012 alone, a rapid increase in assets to the space. Two weeks ago, Vanguard closed its High Yield Corporate mutual fund, which had grown to $17 billion, citing liquidity concerns in the underlying securities.

The tide may be turning now.

A skittish couple of weeks in the market has apparently left investors rethinking their junk bond allocation. More than half a billion dollars in assets were yanked from junk bond ETFs last week.

Fears over a slowing U.S. economy and a knock-on effect from Europe have left people less confident in low-rated debt.

The biggest drawdowns were in the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG), which shed almost $300 million.

On a percentage basis, the PowerShares High Yield Corporate Bond Portfolio (NYSEArca: PHB) lost the most, with about 6 percent of assets being redeemed over the past five days.

There’s some concern, raised by my colleague Paul Amery at IndexUniverse.eu, that low liquidity in junk bonds could cause some extra pain to investors during asset drawdowns, though it’s unclear if those problems have materialized.

If sentiment for corporate junk bonds is starting to weaken, where are all those dollars flowing?

For one, high-yield muni bonds haven’t lost any cash this week; in fact, the Market Vectors High-Yield Municipal Index ETF (NYSE Arca: HYD) gained $12 million, so this may simply be a case of investors looking for marginally safer investments.

But more generally, investors appear to be shifting, for the moment, into lower-yield, lower-risk securities.

Among the biggest gainers in ETF assets has been the Vanguard Short-Term Bond ETF (NYSE Arca: BSV), which took on more than $400 million in new cash this week. And the iShares Barclays 20+ Year Treasury Bond Fund (NYSE Arca: TLT), holding long-dated Treasurys, gained more than $200 million in assets.

It remains to be seen if the outflows trend will continue but, for the moment, it looks like the hot run that junk bonds have been on may be over.


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