New ETFs Veer From Vanilla

July 20, 2017

iShares Edge High Yield Defensive Bond ETF (HYDB)

iShares launched this smart-beta high-yield offering last week. It tracks a proprietary index from BlackRock, unlike more established peers. Aided by the $18 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares had 50% share of the fixed-income ETF market as of June.

A competing offering, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), has $12.5 billion in assets. HYG and JNK track different indices, but both are constructed with a market-cap-weighted approach based on the value of the bonds and not fundamental attributes.

In contrast, HYDB aims to screen out certain bonds with the perceived highest likelihood of default, with a quality slant. Then the model optimizes, in an attempt to improve risk-adjusted returns, by focusing on default-adjusted spreads, seeking value.

From a credit quality perspective, as of mid-July, smart-beta HYDB had higher exposure of assets (50%) rated B than the SPDR’s JNK offering (41%) and the iShares sibling HYG (39%), but a lower stake in bonds rated CCC (12%) than JNK (14%). HYG also had a 12% CCC weighting. HYDB has a 0.35% net expense ratio, below 0.40% and JNK and HYG both have one of 0.49%.

 

Credit-Rating Profiles

Sources: iShares, SSGA website, July 14, 2017

 

CFRA thinks of the newly launched SPMV and HYDB as more like the previously referenced Salted Caramel ice cream, while other launches from last week are more like Mango Buttermilk frozen yogurt.

 

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