Big Dollars Flow Into HYG in Search for Yield Beyond T-Bills

The largest high yield ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), saw its biggest weekly inflow since November 2020.  

That capped a two-week run since May 19, in which HYG went from a $13 billion fund, to $14 billion, to $15 billion and now over $16 billion.  

That brings to mind the scene in that 1980 classic film “Airplane,” where the arriving plane zooms past its assigned gate, as the airport announcer says, “Now arriving at gate 8, gate 9, gate 10, gate 13,” and so on. Is this a sign of market turbulence, or is that high yield about to take off? 

With HYG yielding insignificant returns including dividends since the end of 2019, this has signs of a rush into “high yield” without necessarily understanding what risks come with that label.  

It is notable that a similar assets under management surge occurred in late 2008, when investors assumed the damage of that year’s financial crisis was over.  

As it turned out, there was one more significant air pocket to come. It arrived in early 2009, with HYG losing nearly 20% of its value in only eight weeks, ending on March 6. 

Currently some investors are optimistic following the conclusion of the debt ceiling drama, a potential technical breakout in the stock market, and growing confidence that the Federal Reserve is done hiking interest rates. As shown on HYG’s profile page on etf.com, its 1,200-bond portfolio yields about 8%, carries a modest duration of 3.5 years and is highly liquid.  

What’s not to like? Some may wonder if the high yield bond segment can be trusted, three years after the Fed bought HYG and other “junk bond” ETFs to support that market at the start of the pandemic.  

Such bonds carry ratings of BB and lower, and there is concern that many issuers will have difficulty refinancing their maturing debt at today’s higher rates. That could increase default rates.  

For those considering high yield but looking for another “flight plan” than HYG, there are plenty of ETFs to choose from. Among the 96 such ETFs tracked by etf.com, following are a few notable candidates. 

As the name implies, the SPDR Bloomberg Short Term High Yield Bond ETF (SJNK) limits maturity risk by confining its $3.5 billion portfolio to bonds maturing in three years or less. As with U.S. Treasury securities in 2023, shorter maturities offer very competitive yields. SJNK’s portfolio sports a yield to maturity of 8.8%, though its average credit rating is B, a notch below HYG’s. 

The VanEck Fallen Angel High Yield Bond ETF (ANGL) focuses on bonds that were investment grade at the time of issuance, but have since fallen to junk status. Returns have been competitive compared to HYG, and it yields 7.0%. 

And for those aiming to have their high yield cake and eat it too, there’s a “rookie” ETF: the iShares High Yield Corp orate Bond BuyWrite Strategy ETF (HYGW). It actually owns HYG, but writes covered call options on it to boost yield at the expense of some price appreciation. That has produced a double-digit yield for this relatively undiscovered $24 million ETF. 

The high yield market is attracting a surge in ETF assets, even while T-bill yields remain at elevated levels. Translation: Risk-taking behavior is back, at least for now.