A flurry of new funds focused on high-yield bonds have hit the ETF market in recent months as riskier corporate bonds find themselves at a crossroads. The latest to join the fray is the BlackRock High Yield ETF (BRHY), which debuted on Tuesday. The fund’s managers also run the BlackRock High Yield mutual fund, which has a four-star rating from Morningstar and yields about 6.5%. “It’s a substantially similar ETF. Mutual funds and ETFs are similar,” said BRHY, a mutual fund manager at the University of Pennsylvania. [have] Same portfolio manager, same investment objective. “It’s important to give investors more options and access to strategies in the structure that makes the most sense for them,” said Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock. The ETF is cheaper than a mutual fund, with an expense ratio of 0.45%. The old product’s A class shares have an expense ratio of 0.93%, while the institutional class has an expense ratio of 0.58%. BlackRock’s fund is one of several new high-yield ETFs. Others that have recently launched include the John Hancock High Yield ETF (JHHY), Invesco BulletShares 2032 High Yield Corporation ETF (BSJW) and the AB Short Duration High Yield ETF (SYFI), which was converted from a mutual fund. These new products come amid uncertainty about what the next step for high-yield bonds will be. Treasury yields fell in June, and the Federal Reserve is expected to start cutting rates later this year, giving investors who have tasted yields of 5% or more the opportunity to take more and reap more benefits from ETFs. Investors may consider moving to funds with larger dividends. But if the rate cut coincides with signs of a recession, it could increase default risk and drive down the price of high-yield bonds. In bond traders’ perspective, this means the spread between risky and safe bonds will widen. High-yield bond investors say the sector remains robust, at least for now. Michael Schulenbach, managing director and senior portfolio manager at Marathon Asset Management, compared high-yield bond borrowers to U.S. consumers who held long-term debt, such as mortgages, that were locked in at low interest rates before the Fed’s rate-hiking cycle and are only now beginning to borrow again. “There’s a combination of rising coupon income and a legacy of low interest rates that have benefited corporate fundamentals for the past few years,” Schulenbach said. Marathon is partnering with John Hancock on the JHHY fund, which launched in May. Interest in high-yield funds has been muted this year but has picked up a bit in recent weeks. Four of the top five high-yield bond ETFs have seen inflows in the past month, according to FactSet. Those inflows totaled about $1.3 billion. “We’ve seen occasional bouts of interest in high yield, but overall, investors have been relatively cautious given the near historically tight credit spreads,” said AJ Rivers, head of U.S. retail fixed income business development at AllianceBernstein. This environment could be an opportunity for actively managed ETFs to show off. Fixed income, in particular, is a growth area for active management, and one of their selling points is that professional managers can navigate the fast-changing default risks and liquidity issues that can come from tracking an index. “Our philosophy is, if you don’t lose, you can win,” Rivers said. Schulenbach said active management could make a difference as companies start refinancing their debt. Higher-quality borrowers have been more willing to refinance in recent months. “The ability to capture nuances in credit quality is important when the market is opening up but refinancing activity only makes economic sense for a small percentage of borrowers,” he said. “That’s the majority of the market, but there’s growing variability for that fringe of 5% of borrowers who don’t get to refinance,” he added.
As interest rates start to fall, these new high-yield bond funds come onto the market.
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