Schwab Debuts Low Cost Junk Bond ETF

Schwab Asset Management Inc, the asset management arm of the Charles Schwab Corp., debuted the Schwab High Yield Bond ETF (SCYB) Tuesday, tapping into the demand for lower-cost high yield fixed income products even as interest rates climb. 

The exchange-traded fund, which is Schwab’s ninth bond ETF, began trading July 11 on the NYSE Arca under the ticker SCYB. The fund offers investors an expense ratio of 0.10%, a compelling cost compared with the so-called junk bond industry average of 0.44%. The fund is tied with the SPDR Portfolio High Yield Bond ETF (SPHY) for the lowest fees available.  

“For those investors who are willing to take more risk to earn higher yields, plan to hold for the long run, and ride the ups and down, high coupon payments can help offset price declines over longer holding periods,” Schwab’s Director of Product Strategy Nicohl Bogan told etf.com.  

The fund tracks the total return of the ICE Bank of America US Cash Pay High Yield Constrained Index, which prioritizes liquidity with broad exposure to U.S. high yield corporate bonds. The index only includes issuances above $250 million and has an issuer cap of 2% to mitigate the risk of large downgrades.  

Higher Interest Rates Make Junk Bonds Riskier 

While a higher interest rate environment makes high yield bond returns seem more attractive, the investment comes with the risk that the companies that hold the loans won’t be able to make payments while rates are high.  

Junk bond ETFs aim to cushion some of the risk investors take on when investing in high yield fixed income by diversifying their holdings. There are over 100 junk bond ETFs currently trading, and they generally offer exposure to the debt of U.S. companies rated below BBB. Yet investors have been spooked by rising default rates. This year, investors have drained $6.4 billion from junk bond ETFs.  

Bogan explained that Schwab does not consider market conditions when launching funds, and the ETF is meant to set up investors for long-term returns.  

“Schwab Center for Financial Research expects generally good performance in the bond markets during the second half of the year, although volatility may increase,” she noted. “Investors that are comfortable with high-yield bonds’ higher credit risk may want to consider incorporating high-yield exposure as a component of a diversified portfolio since it can offer a lower correlation to other fixed income asset classes.”   

Contact Lucy Brewster at [email protected] and follow her on Twitter at @lucyrbrewster