In recent months, a slew of new funds focused on high-yield bonds have flooded into the ETF market at a time when riskier corporate bonds are at a crossroads. The latest fund to join the fray is the BlackRock High Yield ETF (BRHY), which debuted on Tuesday. The fund’s manager also oversees the BlackRock High Yield Mutual Fund, which has a four-star Morningstar rating and yields about 6.5%. “This is a substantially similar ETF. Mutual funds and ETFs [have] Same portfolio manager, same investment objectives. “It’s really about giving investors more options so they can get strategies in a structure that makes the most sense for them,” said Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock. “ETFs are cheaper than mutual funds. The BlackRock fund has an expense ratio of 0.45%, while the old product’s Class A shares have an expense ratio of 0.93% and the institutional class has an expense ratio of 0.58%. Income ETF (JHHY), Invesco BulletShares 2032 These new products, High Yield Corp. ETF (BSJW) and AB Short Duration High Yield ETF (SYFI) (converted from mutual funds), are the next step in high-yield interest rates that are already tasting 5% or higher when they start to fall later this year. Yield investors are likely to shift to funds that pay higher. In bond trader terms, that means the spread between risky debt and safe debt will widen, high-yield investors say. Still on solid footing, at least for now Michael Schlembach, managing director and senior portfolio manager at Marathon Asset Management, compares high-yield borrowers with U.S. holdings of long-term debt such as mortgages. Consumers have compared debt that was locked in at low interest rates before the Fed’s rate hike cycle and are just now starting to borrow again, Schlenbach said: “The combination of increased coupon income and the legacy benefits of lower interest rates is surging.” Fundamentals have been favorable to the business over the past few years. Marathon is a partner in the JHHY fund, which launched in May. Interest in high-yield funds has been tepid this year but has picked up in recent weeks. Over the past month, the five largest Four of the broad high-yield bond ETFs saw inflows. Those net inflows totaled about $1.3 billion, said AJ Rivers, head of U.S. retail fixed income business development at AllianceBernstein. “There is occasional interest in high-yield bonds. Overall, though, I think investors are relatively uneasy given that credit spreads are close to historically tight levels. This environment could be an opportunity for actively managed ETFs to prove themselves. Fixed income, and especially active income, is a growing area, and one of the propositions is that professional managers can help deal with the rapidly changing default risk and liquidity problems that tracking indexes can bring. “Our philosophy is, you can win without losing,” Rivers said. Active management has a role to play as companies start to refinance debt, something that prime borrowers have been more willing to do in recent months, Schlenbach said. “When the market opens up, the ability to capture the nuances of credit quality is important, but refinancing activity only makes economic sense for certain groups of borrowers,” Schlenbach said. “That’s a large portion of the market, but we’re seeing the tail end of it. There’s increasing fragmentation – 5% of borrowers don’t make it,” he added.
