With oil prices and the energy sector still under pressure and no confirmation that the Federal Reserve will not raise interest rates, embracing high-yield bonds and the corresponding exchange traded funds might seem like a risky idea.
Focusing solely on interest rate risk, that is an issue for the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) and the SPDR Barclays High Yield Bond ETF (NYSE:JNK). HYG and JNK, the two largest junk bond ETFs by assets, have and average duration of 4.3 years. Duration measures a bond's sensitivity to changes in interest rates.
Investors looking to remain engaged with high-yield corporate bonds while managing interest rate risk with JNK's shorter duration cousin, the SPDR Barclays Short Term High Yield Bond ETF (NYSE:SJNK).
SJNK's duration is just 2.4 years, according to State Street data, but the ETF has other compelling attributes that makes it worthy of consideration even in a trying environment for junk bonds.
Energy default fears have caused spreads on an index of short duration high yield bonds to widen beyond their recent averages, pushing down prices. But, tactically speaking, historical analysis of the past 20 years indicates that when short term government yields rise in a given month, short duration high yield spreads tighten by 3%. In a recent survey, economists forecast the US 2-Year Yield to be 1.09% by the end of the year, which is over 40 basis points higher than today's yield. This historical analysis would point to short term high yield bond prices rising from current levels, as spreads revert to the mean, said State Street Vice President David Mazza ina new blog post.
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Mazza highlights an important point: High-yield investors have been skittish, and rightfully so, about rising defaults in the energy patch. However, SJNK's weight to energy issuers is below that of longer duration fare, such as HYG and JNK. Importantly, high-yield default rates remain below historical norms. Excluding energy defaults, short-term junk default rates were about half the long-term average over the past year.
SJNK has a 12% exposure to energy, which is lower than the broader index of high yield exposures and will help to limit its potential exposure to possible defaults. At the same time, SJNK has a 30% exposure to consumer-related industries, and this has been a consumer-led recovery, according to Mazza.
More good news regarding SJNK: As has been seen with otherfixed-income asset classes tracked by ETFs offering less interest rate sensitivity, SJNK does not require income investors to make a significant yield sacrifice. The ETF's 30-day SEC yield of 6.38 percent is only slightly below the 6.62 percent found on JNK.
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