April 3, 2012
The Beta Investment Report | High Yield Bond ETFs | 4.3.12
Here’s the latest installment of our ongoing review of ETFs that can be used to replicate the Global Market Index (GMI), a passive, unmanaged benchmark that’s comprised of the major asset classes. In the previous edition, we looked at broadly defined, investment-grade U.S. bond funds. Today's focus is on high yield ETFs.
In particular, we're looking at three junk bond products targeting the U.S. fixed-income market. A new ETF was recently launched that caught our eye: SPDR Barclays Capital Short Term High Yield Bond (SJNK). This fund, which targets the shorter maturity spectrum of junk bonds, started trading last month and so it's still on our wait-and-see list.
Meanwhile, our formal short list is comprised of three high yield ETFs. These are the funds that meet certain criteria, including an expense ratio no higher than 0.5%, a passive index-replication investment strategy, and a track record of at least three years. The three ETFs that pass our test are generally comparable, although our first choice is SPDR Barclays Capital High Yield Bond (JNK). Its moderately lower expense ratio is an attraction, an edge that seems to be helping it outperform for the trailing three-year period vs. the other two funds.
Then again, we don't expect radically different results from these funds over the medium- and long-run horizons. As such, all three are more or less interchangeable for use in replicating GMI and other multi-asset class strategies. Indeed, performance correlations over the last three years between these three products is roughly 0.95, according to Morningstar Principia. (A correlation of 1.0 indicates perfect positive correlation; zero reflects no correlation.) That's a sign that these ETFs share similar if not quite identical risk profiles. No doubt there'll be short-term differences, perhaps surprisingly so at times, given the different benchmarks and replication procedures. But in the context of GMI, the expected differences are unlikely to be game changers one way or the other. That said, if we must pick just one from the list, JNK is the current preference for capturing a broad definition of the high yield beta via an ETF.
Posted by jp at April 3, 2012 12:43 PM