Energy & Junk Bond ETF Investors Fret As Oil Swoons

March 10, 2017

For the first time in 2017, oil prices fell below $50/barrel, infusing a bit of concern into a stock market that hasn't had much to worry about so far this year. WTI oil futures were last trading around $49, down 8.9% on a year-to-date basis.

Oil's sudden move lower is somewhat reminiscent of last year, when prices shockingly plunged to a 13-year low of $26. Prices today are a far cry from those lows registered last January and February, but they've moved swiftly enough to raise the pulse of an otherwise-subdued market.

ETF Losers From Oil's Swoon

The drop has put pressure on oil ETFs such as the United States Oil Fund (USO), down 11.3% year-to-date; broad commodity ETFs such as the PowerShares DB Commodity Index Tracking Fund (DBC), down 5.5% year-to-date; and energy equity ETFs such as the Energy Select Sector SPDR Fund (XLE), down 8.3% year-to-date.

Indeed, the energy sector―as measured by XLE―is far and away the worst-performing stock market sector of 2017 so far. With the exception of telecom, no other sector is in the red for the year.

Sinking oil prices have also had a detrimental effect on another market: junk bonds. Since oil's descent began a few weeks ago, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) lost 2%. Granted, HYG is still up 0.9% year-to-date, but the wind has clearly been taken out of its sails as investors imagine a scenario, much like last year, where energy-sector defaults tick higher as oil prices continue to fall.

In 2016, U.S. energy companies defaulted on $39 billion worth of high-yield bonds, according to Fitch, pushing the overall junk bond default rate to a seven-year high.

YTD Returns For USO, DBC, XLE, HYG


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