Not-So-Costly ETFs Best Route To High Yield

New research advises fund managers to go for the cheaper option and track a high yield index via an ETF instead  

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

New research advises fund managers to go for the cheaper option in high yield and invest in an exchange traded fund (ETF) while demand for this asset class remains high, even though the yield available has fallen to a record low level.

A new report, published by Cerulli Associates, said that high yield funds are producing around 5 percent yield, which is a lot less than in 2009 when certain funds in this space “often exceeded 50 percent”. However, clients are still clamouring for high yield as base rates remain low and government debt yields keep drifting lower.

"Europe has arrived in the high-yield space. Asset managers not yet reaping the benefits can either launch a fund or put more European content into an existing global fund, but with costly active products leaving even less net return, exchange-traded funds may be the best route," said Barbara Wall, Europe research director at Cerulli.

Corporate high yield ETFs have seen global inflows of $4.9 billion this year to the end of June, according to data from BlackRock, slightly more ($0.3 billion) than this time last year, but the sector saw outflows in May and June.

“However, yields remain attractive relative to other opportunities in the market and fundamentals are still sound,” the BlackRock Landscape report noted.

Deutsche Bank research from 17 July showed that certain high yield ETFs rank amongst the top selling fixed income ETFs, including the iShares $ High Yield Corporate Bond UCITS ETF (SHYU) at €1.3 billion year to date, and the iShares Euro High Yield Corporate Bond UCITS ETF (IHYG), with €1.1 billion since 1 January.

Cerulli noted that in an era of low interest rates, there are other options apart from high yield in the active fund world.

"Emerging market debt may make the offering more attractive, especially for investors who understand that high yield does not have to be just about U.S. corporate bonds, even if many funds, including 'global' funds aimed at European investors, have stayed largely within that space," added Cerulli analyst Brian Gorman.

Investors should look for a diversified index when investing in these bonds, in case there are defaults. Cerulli noted that one default is not catastrophic as many active managers are spreading the risk by having several hundred holdings, “sometimes by tracking a suitable index”.


Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.