High-yield corporate bond ETFs bounce back in April

May 3rd, 2018 | By | Category: Fixed Income

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ETFs providing exposure to high-yield corporate bonds enjoyed strong returns in April, bouncing back from weak performance in the first quarter of 2018.

High yield ETFs bounce back

ETFs providing exposure to high yield corporate bonds have bounced back in April with most providing returns in excess of 2%.

BlackRock‘s iShares $ High Yield Corp Bond UCITS ETF (SHYU LN)—the largest of its kind listed in Europe with over $3.8 billion in assets under management—was among the top high-yield performers for the month, with a return of 2.5%.

Similarly, the Lyxor BofAML $ High Yield Bond UCITS ETF (USHY LN) mirrored that return with a 2.5% gain over April.

Both funds provide broad market exposure to US dollar-denominated high-yield corporate bonds from issuers in developed countries.

The iShares fund (SHYU) does this by tracking the Markit iBoxx USD Liquid High Yield Capped Index. The fund has a total expense ratio (TER) of 0.50% and trades in EUR, GBP and USD.

The fund had a rocky start to the year, losing nearly 5% of its value in January amid concerns over the impact of rising interest rates on fund performance. Investors fled from the fund to the tune of $400 million in February outflows.

The fund’s performance was relatively flat through February and March. It partially recovered some of its AUM in March with inflows of $134m but lost a further $76m in April despite its improved performance that month.

Monthly flows for iShares $ High Yield Corp Bond UCITS ETF

Monthly flows for iShares $ High Yield Corp Bond UCITS ETF.

High-yield ETFs offering access to the shorter-duration end of the maturity spectrum were the best performers for the month – the PIMCO Short-Term High Yield Corporate Bond Index Source UCITS ETF (SSHY LN) ended April up 2.7%.

Another area of the high-yield universe to benefit from the improving sentiment were ETFs providing exposure to “fallen angels” – bonds that were originally rated as investment grade but have since been downgraded into junk status. One such fund, the iShares Fallen Angels High Yield Corp Bond UCITS ETF (WING LN), rose 1.9% for the month.

The fallen angels strategy is based on the premise that the overly negative sentiment surrounding a downgrade into junk status causes fallen angels to be regularly oversold as investors (often forced by their investment mandate) sell en masse prior to and at downgrade, leading to a price anomaly.

WING provides exposure to a market cap-weighted index of US dollar-denominated fallen angel bonds. Its TER is 0.50%.

The PowerShares US High Yield Fallen Angels UCITS ETF (HYFA LN), offering another avenue for investors to gain exposure to fallen angels, achieved a 1.8% return for April.

Although HYFA is a relatively small fund, with just $68m in AUM, it has attracted investors’ interest lately, pulling in $9.9m in February and a further $12.2m in March.

Monthly flows of PowerShares US High Yield Fallen Angels UCITS ETF

Monthly flows of PowerShares US High Yield Fallen Angels UCITS ETF.

The fund is linked to the innovative smart beta-esque Citi Time-Weighted US Fallen Angel Bond Select Index. The index is time-weighted, allocating higher weights to those bonds that have been downgraded most recently in an attempt to maximise the return from any ‘V-shaped’ bounce the downgraded bonds may exhibit.

Unlike traditional bond indices, where constituent weights are based on the market value of outstanding debt issuance, constituent weights are determined based on the time from inclusion in the index. Any bond entering the index is given a predefined time score and, starting from the thirteenth month upon entering the index, that score is gradually reduced. On each monthly rebalancing date, the time scores for all bonds in the index are normalized to weights that sum up to 100%.

The fund has a TER of 0.45% and trades in USD, EUR, GBP and CHF.

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