How do you feel about Doritos, fast-food pit stops, and ice cream sundaes?
Investors have the same kind of love-hate relationship with junk bonds as you may with junk food.
As the chart above shows, flows have been up and down over the past two years. Inflows largely track the trajectory of interest rates: when rates fall, investors have more incentive to search for yield among the riskier corners of financial markets (“junk” refers to bonds issued by more speculative borrowers).
The slower pace of inflows during the current quarter may reflect economic and market concerns as much as responses to interest rate shifts, however.
What the chart doesn’t show is exactly which junk bond exchange-traded funds are grabbing the most money. As Elisabeth Kashner, FactSet ETF research director, who shared the data with MarketWatch, put it, in this category there are “two Goliaths, a few next-tier funds,” and everyone else.
The “Goliaths” are the iShares iBoxx High Yield Corpoate Bond fund HYG, +0.25%, which has nearly $19 billion in assets, followed by the SPDR Bloomebrg Barclays High Yield Bond fund JNK, +0.25% with over $10 billion under management. Both have been around since 2007 and both charge a fairly hefty management fee, as ETFs go: 49 basis points for HYG and 40 for JNK.
The newer upstarts include the Xtrackers USD High Yield Corporate Bond ETF HYLB, +0.22% and the iShares Broad USD High Yield Corporate Bond ETF USHY, +0.13%. Launched in 2016 and 2017, respectively, they’ve gathered $4 billion and $2.7 billion, while charging investors less than half what their older competitors command: 15 basis points for HYLB and 22 for USHY.
“Who in their right minds would go for the expensive funds when the cheaper ones provide similar exposure?” Kashner asked rhetorically. She explained: when institutional investors use ETFs to make tactical trades – that is, buying and selling without the expectation of holding long-term – they want to use the biggest funds available to make sure trades always settle as they expect.
“In those cases liquidity is king,” Kashner said. “There are users out there willing to pay additional expenses for the ease of execution.”
Despite that, the two “Davids” mentioned here may be gaining on their bigger competitors. So far this year, both have seen roughly $2 billion in inflows, compared to $5 and $3 billion for HYG and JNK. There’s a bit of a divide in terms of performance: the two biggies have seen year-to-date returns of about 7%, compared to about 6% for HYLB and USHY. Of course, those pale compared to stocks: the S&P 500 SPX, +0.75% has returned 24% in the same timeframe.
As Kashner put it, “The search for yield almost always involves risk.”