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 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).
Another approach to a differentiated high-yield exposure is fundamentally weighted ETFs, currently offered in the PowerShares Fundamental High Yield Corporate (PHB | C-78). Unlike the aforementioned names, PHB will invest only in high-yield securities (so no BBB exposure).
However, unlike the broad exposure, PHB has no exposure to bonds rated CCC or lower. Therefore, in terms of a risk/return profile, it should fit in between the crossover exposure and broad high yield.
While the option-adjusted spread and yield to worst in PHB are higher than the aforementioned crossover names, they are lower than in HYG and JNK:
In addition, the returns fall in line as well:
One last group I will look at is fallen angels, available via the Market Vectors Fallen Angel (ANGL | C-51). The differentiating factor here is that exposure will only include high-yield bonds that were investment grade at issuance (and have since been downgraded).
While only high yield is included, the makeup of the constituents will be different from the other pure high-yield names previously mentioned:
Moving down the spectrum, ANGL appears to fall in between PHB and HYG/JNK in terms of characteristics. Once again, the return stream follows suit:
Given that the hot button topic surrounding high yield (particularly in the recent downward pressure) is the underlying energy exposure, I would be remiss not to highlight the differences in said exposure between all the aforementioned names with an industry-level breakdown:
While the overall energy exposure is not significantly different, there are a few deviations. An example is that the crossover names have a slightly higher pipeline exposure from the inclusion of the names rated BBB.
While there is a sense of trepidation surrounding the high-yield market, particularly in the recent sell-off, there is a spectrum of names available that lend themselves to a higher-quality high-yield exposure. Whether it is from inclusion of securities rated BBB, a different weighting scheme or a more limited high-yield constituent universe, those looking for exposure do not have to rely on only broad high-yield ETFs.
At the time this article was written, Stadion held long positions in QLTB. The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or www.stadionmoney.com.