HYG, JNK Hauled In $2 Billion In October

November 07, 2011

Flows into junk bond ETFs surged in October as investors took on risk.

Investors plowed a total of nearly $2 billion into two of the ETF market’s most popular junk bond funds last month, amid a broader appetite for risk inspired by encouraging developments in Europe that also fueled $20 billion in inflows into both domestic and international equity funds.

The $10.14 billion iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) pulled in $1.1 billion in October, while the $8.359 billion SPDR Barclays High Yield Bond (NYSEArca: JNK) gathered $943 million during the same month. Those gains came on top of September inflows of $475.5 million for HYG and $679.2 million for JNK, another month when investors looked to take on risk in the form of high-yield debt.

The appetite for risk continued in the first week of November, with HYG hauling in another $87.74 million on Nov. 3, and making it onto IndexUniverse’s “Top 10 creations” list.

“I think that it is just purely reflective of greater risk appetite among managers,” says Paul Weisbruch, vice president of ETF/Options Sales and Trading for King of Prussia, Pa.-based Street One Financial, “Managers obviously are more comfortable with equities now and less comfortable owning things like lower-yielding Treasurys and very conservative cash-type investments.”

However, the asset inflows into junk bonds and equities have been anything but one-way. Indeed, the two big junk bond ETFs suffered sizable outflows in August, after markets were thrown into serious turmoil after Standard & Poor’s downgrade of long-term U.S. debt. HYG hemorrhaged $184 million and JNK saw $332 million in outflows.

In the end, the quick asset flows into and out of junk bonds in the last three months epitomizes the “risk-on/risk-off” dynamic that has characterized financial markets since the 2008-2009 market meltdown.

Highly Tradable Junk

A major attribute of junk bond ETFs in volatile times is that, unlike direct trading in junk bonds, the ETF structure offers more immediate entry and exit if investors sense either opportunity or trouble on the horizon.

“The instant-liquidity is obviously a positive attribute,” said Weisbruch. “It’s much easier to price the ETF from a basket level than trading those individual securities on a one-off basis.”

Apart from tradability, yields on junk-bond ETFs are also attractive, particularly at a time when official short-term interest rates in the United States are near zero.

HYG, for example, currently has a 30-day SEC yield of 7.67 percent, while JNK’s is 7.82 percent. JNK comes with an annual expense ratio of 0.40 percent, compared with 0.50 percent for HYG.

Better yet is the yield of the $59 million AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD), which launched in November 2010. HYLD, an actively managed portfolio of 46 holdings, has a 30-day SEC Yield of 9.74 percent, which might helped offset its relatively high net expense ratio of 1.36 percent.

However, according to data compiled by Bloomberg, HYG has the highest year-to-date total return, at 4.10 percent, followed by JNK at 3.40 percent, and HYLD at 0.86 percent.

U.S. ETFs gathered almost $24 billion in new assets in October, as we wrote about in our monthly flows story  “Investors Brave Equities.”

Year-to-date inflows are now more than $100 billion, with total assets in U.S. exchange-traded funds nearly $1.082 trillion, according to data compiled by IndexUniverse.


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