Tag Archives: PowerShares Fundamental High Yield Corporate Bond Portfolio

High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

“This looks to be an exit trade from this asset class,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital in a note, rather than a move to receive delivery of actual bonds.

Specifically, Hempstead’s desk has been very active in SPDR Barclays Capital High Yield Bond ETF (JNK), which dropped 1.3% to $38.19; iBoxx $ High Yield Corporate Bond Fund (HYG), which fell 1.4% to $87.59; PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB), down 0.4% to $18.46, and SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), down 0.6% to $29.70.

After a redemption of about $725 million in the SPDR Barclays Capital High Yield Bond ETF last week, allegedly for delivery of actual bonds, Hempstead says the pace of selling in high yield ETFs needs to be closely monitored.

So far this year, each of these funds has seen a significant increase in assets, for a total of more than $6 billion year-to-date. With the iBoxx fund holding $14.8 billion in assets under management, the SPDR high yield ETF holding $11.2 billion, the PowerShares ETF at $943 million and $119 million in the SPDR short-term high yield, all the funds have about doubled their assets since January 2011, says Hempstead.

“We are watching closely to see how well the Street can absorb a short-term exit strategy from these funds,” said Hempstead in a note. “How would the fixed income world respond to a heavy and swift sell-off in an ETF product space that has seen a steady inflow of assets for almost 18 months?”

He adds the products have started trading at a discount to their respective NAV, which is not uncommon, but they have a tendency to trade at a premium for longer periods than at a discount.

Arnott Makes Fundamental Bond Index

Bloomberg recently did a profile of Rob Arnott, the father of fundamental indexing.

Arnott, whose Research Affiliates Fundamental Index, or RAFI, provided the foundation for the first ETF based on an fundamental index, the PowerShares FTSE RAFI US 1000 Portfolio (PRF) and others, is now working on making fundamental indexes for bonds.

Instead of valuing stocks based on price, as in a market-cap weighted index like the S&P 500, the fundamental index uses fundamental metrics such as cash flow, book value, sales and dividends to determine a companies valuation.

According to Bloomberg, the PowerShares FTSE RAFI US 1000 Portfolio posted annualized returns of 5.3% from its inception on Dec. 19, 2005, through May 9, beating the 3.2% return of the Vanguard 500 Index Fund, which tracks the S&P 500.

The new bond indexes will measure a borrower’s health, such as GDP, assets available to service debt, a nation’s land mass and energy consumption. PowerShares last year began using Arnott’s bond index in the PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB). It returned 8.9% from Aug. 2 to May 9 vs. the 11.7% gain in the SPDR Barclays Capital High Yield Bond ETF (JNK). Let’s see how it does now that junk bonds appear to be peaking.