Guess What? Junk Bond ETFs Love Oil's Resurgence

Markets Benzinga

In news that is not exactly stunning to seasoned followers of the high-yield corporate bond market, junk bonds and the related exchange-traded funds are enjoying oil's rebound. After all, it was slumping oil prices and the specter of high-yield energy sector defaults that dragged on junk bond ETFs last year.

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Knowing that there is an overt correlation between oil prices and high-yield corporate bonds and that crude touched its highest levels of 2016 on Monday, the takeaway is that junk bond ETFs are back in style.

Well, sort of.

Junk Bond ETFs And Oil

The extra spread required by investors to hold high yield oil and gas bonds is the most overt indicator of improving investor sentiment in the asset class, as that gauge of credit risk has halved from the highs seen in mid-February. At that time, investors required an all-time high of 1674bps of extra yield in order to hold dollar denominated bonds issued by non-investment grade rated oil and gas firms when WTI oil traded at its $26 per barrel lows, said Markit in a new research piece.

Related Link: Be Realistic With Junk Bond ETFs

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That does not mean investors are universally enthusiastic about high-yield ETFs. Although the United States Oil Fund LP (ETF) (USO), which tracks front month West Texas Intermediate crude prices, is up nearly 9.5 percent year-to-date, investors have yanked nearly $845 million from the iShares iBoxx $ High Yid Corp Bond ETF (HYG).

HYG, JNK And ANGL

HYG, the largest high-yield bond ETF, has also suffered some massive one-day outflows in recent weeks. Data suggest investors are missing out.

This improving sentiment is translating into real returns for holders of high yield oil and gas bonds as the Markit iBoxx USD Liquid High Yield Oil & Gas Index has delivered over 54 percent in total returns from its February lows. This phenomenal rebound has put the asset class into positive territory for the year, with the index now up by over 20 percent year to date (ytd) on a total return basis, added Markit.

Investors are not eschewing all high-yield corporate ETFs. HYG's primary rival, the SPDR Barclays Capital High Yield Bnd ETF (JNK) has more exposure to energy debt than does HYG so perhaps it is not a coincidence that JNK has hauled in $2.1 billion in new assets this year.

Related Link: Yes, This Junk Bond ETF Is Sufficiently Liquid

Although it has not taken in the most assets, the VanEck Vectors Fallen Angel High Yield Bond ETF (Market Vectors ETF Trust (ANGL)) is arguably the biggest beneficiary of oil's rebound among high-yield bond ETFs. For most of last year, ANGL's big advantage was its low energy exposure.

The Flip Side

Now, the reverse is true. Due to a spate of energy issuer credit downgrades, turning bonds born as investment-grade into junk bonds or fallen angels, ANGL's combined energy and materials exposure is over 47 percent.

Investors have certainly been enthusiastic about ANGL. The ETF topped $100 million in assets under management in March and the ETF now has $185 million in AUM.

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