This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
Over the past few weeks, the tumultuous high-yield bond market has once again been brought to the forefront.
As index spreads are reaching levels last seen in June 2012, jitters abound. The two largest and widely traded high-yield ETF names— the iShares iBoxx $ High Yield Corporate Bond (HYG | B-68) and the SPDR Barclays High Yield Bond (JNK | B-68)—both had all-time-high trading volumes on Dec. 11.
In addition, based on drops in shares outstanding of both names, it appears the majority of the action was clients selling positions. With this trepidation, clients may be searching for alternative exposures. While shifting asset classes may be an option, here I will look at some alternative high-yield ETFs outside the aforementioned names in which clients can get slightly differentiated exposure.
Crossover Exposure
Crossover names will invest in a mix of securities rated BBB/Baa and BB/Ba. While not pure high-yield exposure as investment-grade BBBs are included, the high-yield exposure these funds do have will be limited to the higher-quality names only, as anything rated B or lower will be excluded. There are currently two crossover ETFs available: the SPDR BofA Merrill Lynch Crossover Corporate Bond (CJNK | C) and the iShares Baa - Ba Rated Corporate Bond (QLTB | B-37):
The major difference in these two names is that CJNK has an almost 50/50 BBB/BB allocation, whereas QLTB has less exposure to the BB, at roughly 25%.
This also shows in CJNK’s slightly lower duration, as well as its higher option-adjusted spread and yield to worst. Again, both will exclude any of the names rated B and lower, which make up approximately 50% and 60% of HYG and JNK, respectively.
This lower-rated exposure has been a drag on the broad high-yield names since the end of May. Below is a return graph of the four names since the end of May, and a breakdown of returns per rating bucket over the same period (based on Bloomberg data), which shows the lower-rated buckets having a much lower return (example, the CCC bucket is down roughly 20% since end of May).
