Tag Archives: investing

Junk Vs. Investment Grade Corporate Bond ETFs

The high-yield junk bond market was a troubled zone in 2015 due to the dual threats of the oil price collapse and the Fed lift-off. As a result, the high-yield or junk bond ETF space was deep in the red. Even the investment-grade corporate bond ETFs gave muted performances last year thanks to the rising rate worries, but the decline was lesser than the junk bond ETFs. The fact that the U.S. energy companies are closely tied to the high-yield bond market, with the former making up about 15% of junk bond issuance, has been blamed for the massacre, as per CNBC . Thus, fears of their default amid the oil price rout triggered the junk bonds’ sell-off last year. Who is the Winner So Far This Year? However, things started to change at the start of 2016. Hard landing fears in China, crash in global financial markets and no meaningful recovery in the Japanese and European economies brightened the bid for safety this year. As investors flocked to U.S. treasuries, the yield on the benchmark 10-year Treasury bonds has remained under 2% since February. This in turn sharpened the drive for high income and brought junk bond ETFs back into the business as investors downplayed the default issues associated with junk bond ETFs. Added to this, the recent rebound in oil prices and the resultant risk-on sentiments in the market triggered investor interest in the junk bond ETF space. Plus, cheaper valuation after two subdued years made the area relatively well positioned to bet on. Investors poured more than $1.16 billion and $1.13 billion respectively in the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) in the five days ending March 3, 2016. Investment-grade corporate bond ETFs, however, fell slightly below junk bond ETFs since the former offer lesser yields. The outperformance in the latter was more palpable in the last one-month time frame (as of March 8, 2016). Investment-Grade Leaders In the last one month, top performances were put up by the Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) , Credit-Scored U.S. Long Corporate Bond (NASDAQ: LKOR ) and Investment Grade Interest Rate Hedged ETF (BATS: IGHG ). While VCLT and LKOR added 2.8% each, IGHG advanced 2.4%. Junk-Bond Winners On the other hand, junk bond ETFs clearly surpassed the investment-grade bond ETFs in the last one-month frame. Below, we highlight three such ETFs. ProShares High Yield-Interest Rate Hedged ETF (BATS: HYHG ) – up 9.9% HYHG is an ETF, which has an interest rate hedge built into its strategy as it takes a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield of about 6.40% (and a modest expense ratio of just 50 basis points) indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. The fund is up 0.9% so far this year. Market Vectors Fallen Angel Bond ETF (NYSEARCA: ANGL ) – up 7.8% This innovative fund uses the sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index and focuses on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from grace and are now trading as junk bonds. The fund yields 5.28% annually while it charges just 30 bps in fees. The fund was a top performer even in the year-to-date frame having scooped up 4.3% gains. SPDR Barclays Capital High Yield Bond ETF (JNK) – up 6.8% This fund includes publicly issued U.S. dollar denominated, non-investment grade corporate bonds. The corporate sectors are Industrial, Utility and Financial Institutions. The fund has scratched up 0.4% gains this year and yields 6.62% in dividend. Original Post

What To Do When You Miss The Move In An ETF

Every correction in the stock or bond market unfolds in a different manner. While our natural inclination is to try and make comparisons to prior events or rationalize statistical probabilities for a turn, there is no easy way to know when an investable bottom has truly materialized. From a valuation perspective, cheap can always get cheaper until it goes to zero. Similarly, from a technical perspective, lines of support can always be broken by new trends or forces that materialize in the midst of a decline. In recent years, it has become commonplace for sharp rallies or “V-bottoms” to form with very little notice to those who aren’t quick on the trigger. These are generally caused by capitulation near the low as sentiment reaches extreme negative readings. This fear ultimately leads to a snapback in price as an unforeseen catalyst sparks a rubber band effect. The problem is that it isn’t easy to time these events. Let me give you an example. Last year I wrote about the downtrend in junk bonds as risk averse investors were jumping ship at a breakneck pace. I prophesized that I would be a buyer of high yield in 2016 for my clients to take advantage of the widening spreads and relative valuation metrics. That type of premise looks prescient when you are sitting on the sidelines watching the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) crater with cash to deploy. However, it becomes much more difficult to execute in real life prior to a sharp 10% rally that unfolds in a matter of just three weeks. I fully admit that we missed this opportunity. It may have been the result of being overly cautious or simply remaining skeptical that such a voracious move could materialize so quickly. Fortunately, we still have other risk assets in the portfolio that are able to meaningfully contribute to this recovery in the stock and credit markets. The conservative nature of our investment mandate dictates that I would rather look back with regret on a potential missed opportunity than suffer the consequences of an overly aggressive stab in the dark. We only know in hindsight how this picture unfolded and of course have yet to determine what the ultimate resolution will be. The question now becomes: was this an intermediate-term low or simply the result of an oversold asset demonstrating a sharp ramp that will ultimately fall apart over the coming months? There is no way to know with certainty what the outcome will be in the future. However, you do have a few options to consider when you’ve missed the boat on a big move: Buy anyways. It may seem silly to buy after a big run, but there is no law saying that a fund like HYG can’t move all the way back to its prior highs near $87. There is still another 8% of overhead space between its current price and that level. I’m not saying that event will occur with a high conviction, but you can’t rule it out either. Break up your allocation in pieces. Another way to play this opportunity is to break up your trade in smaller pieces. If you were planning on a 5-10% allocation, you may be able to break that into two or three parts in order to allocate equally over time. That gives you the flexibility to participate if the new trend continues without the all-in risk that you face in a single trade. Of course, the drawback is that you will wish you had just gone with the whole allocation if this succeeds. Transaction-free ETFs make for a very effective tool to accomplish this task. Have patience. There is nothing wrong with sitting and watching either. Time is on your side if you have been carefully managing your exposure and have other risk assets that are participating in the upside move. You may want to wait and see if some of the momentum gets worked off and this sector retraces a portion of its recent strength. Watching for a higher low to develop may be a potential entry opportunity that is waiting in the wings. Move on. My grandfather was early to the trend following philosophy four decades ago and used to tell me that “lost opportunity is better than lost money”. There is no doubt that both are equally frustrating. However, history has proven that there will always be fresh opportunities in the market that are simply waiting to be sniffed out. Putting one in the rear view mirror allows you to focus on new themes that may just be peaking over the horizon. Spending too much time on “shoulda, coulda, woulda” criticism is a drain on your time and resources. Those with the longest time horizons are typically best served by using weakness to their advantage in order to buy at lower prices and reap the rewards of long-term growth. Conversely, those with short-term time horizons are often jumpy to try and sidestep every drop or driven to leap at new possibilities before they have adequately proven themselves. I am optimistic that we will still get our shot to re-allocate more direct exposure to high yield credit at a time and price that suits our philosophy . A little patience now will likely pay off in spades as we continue to navigate our way through these choppy markets. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.