For once, investors are opting for a more expensive fund.
The second-largest high-yield bond ETF, the $9.84 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK), has led in outflows this week, shedding $359 million in net investor assets.
Curiously, the largest high-yield bond ETF, the $17.2 billion iShares iBoxx USD High Yield Corporate Bond ETF (HYG), has gained $379 million over the same period.
We say “curious,” because although HYG is significantly larger and more liquid than JNK, HYG is also more expensive. HYG costs 9 basis points more than JNK, at 0.49% to 0.40%.
Rarely these days do you see investors pull money from a less expensive fund at the same time they put money into a more expensive competitor.
Why Investors Are Ditching JNK
No explanation for the short-term switcheroo was immediately obvious. Performancewise, JNK has outperformed HYG on a one-month basis, rising 0.93% to HYG's 0.91%. JNK also currently offers a higher dividend yield than HYG, at 5.42% to HYG's 5.09%.
Nor were clear differences in portfolio composition to blame, because under the hood, JNK and HYG are very similar funds. Both track a market-cap-weighted index of high-yield corporate debt, though HYG holds more bonds than JNK, at 1,024 to 951. In fact, 18 of the two funds' top 20 holdings are the same.
Could investors be using JNK to express short-term worries over the future of high-yield bonds? It's possible. But usually, when traders go tactical, they tend to deploy the most liquid trading instrument in a given segment. JNK, while highly liquid, is significantly less so than HYG; it has about half the assets of HYG and barely 40% of its daily trading volume.
Outflows Part Of Larger Trend
Intriguingly, this week's flows out of JNK hint at a longer-term pattern. Year-to-date, HYG has lost about $318 million in outflows, while JNK has lost $2.61 billion.
Even longer-term investors have fallen out of love with JNK. But why?
Possibly because, year-to-date, HYG's returns squeak by those of JNK, at 1.9% to 1.21%.
Source: StockCharts.com; data as of Aug. 30, 2018
On a one-year basis, the return gap is even starker: HYG has returned 3.05% over the past 12 months, compared to JNK's 2.44%.
One potential explanation for the performance difference could be duration. Duration is a measure of a bond's sensitivity to interest rates: The higher a bond’s (or bond ETF)'s duration, the more it will be impacted by interest rate hikes.
JNK has a duration of 3.52, which is just barely higher than that of HYG's 3.45, meaning HYG should be impacted slightly—very slightly—less than JNK when interest rates rise.
But with the Fed planning a slow, steady climb for rates for the foreseeable future, "slightly less" might be what makes all the difference to investors' bottom lines.
Contact Lara Crigger at [email protected]