High-yield corporate bond exchange traded funds have recently endured ample criticism.
Carl Icahn even went so far as to call BlackRock, Inc. (NYSE:BLK), the world's largest asset manager and issuer of the iShares iBoxx $ High Yid Corp Bond (ETF) (NYSE:HYG), dangerous due to its high-yield bond exposure.
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An oft-cited critique of junk bond ETFs is that these funds would be vulnerable to a so-called liquidity event where panic selling would jam the exits because there, in theory, would be a dearth of buyers to absorb excess ETF supply.
As we have mentioned countless times in the past, average daily trading volume in terms of ETFs does not necessarily accurately reflect the true underlying liquidity of that given ETF, however in this category, because the underlying portfolios are made up of High Yield Corporate Bonds, liquidity can at times be challenging given market conditions and the nature of the dynamics of the High Yield Corporate Bond markets themselves, said Street One Financial Vice President Paul Weisbruch in a note out today.
The liquidity debate is not the only argument hampering high-yield bond ETFs these days. Rising interest rates and deteriorating balance sheets among energy companies that have been prolific issuers of junk bonds are also causes for concern. While it should be ignored that it is hitting new lows today, the SPDR Barclays Short Term High Yield Bond ETF (NYSE:SJNK) is an alternative to traditional junk bond ETFs that merits consideration if this asset class emerges from its recent malaise.
While SJNK's descent to new lows and a 2.6 percent year-to-date, which is worse than its longer duration cousin, the SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK), are not confidence-building traits, SJNK has some perks.
For starters, the ETF's exposure to energy issuer of junk debt is below that of ETFs like HYG and JNK. With oil prices slumping, a catalyst expected to trigger more defaults among flimsy energy issuers, a bond fund's weight to junk energy debt, or lack thereof, is a critical consideration for investors.
On the interest rate front, SJNK's modified adjusted duration is 2.35 years, according to issuer data. That is nearly two years lower than the comparable metric on JNK.
That does not mean SJNK is entirely immune to hawkish changes in Federal Reserve policy, but the lower duration does say the ETF is not as vulnerable to rising rates as its longer duration counterparts. Of course, for access to SJNK's lower duration investors will sacrifice some yield, though not much. SJNK's 30-day SEC of 5.94 percent is 25 basis points below JNK's.
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