Tag Archives: ProShares Short High Yield

High Yield ETFs Look Especially Risky Now

Robert Powell of MarketWatch today says you should buy junk bonds, while Zero Hedge says he’s turned bearish on the sector.

I’m going to go with Zero Hedge because he makes a more compelling case, and in fact, if you didn’t see the headline on the Marketwatch story, you might think it was telling you to sell as well. In fact, the Marketwatch story’s big bull, Steve Huber, manager of the T.Rowe Price Strategic Income fund says, “To be sure, there is a scenario when investing in junk bonds might not so wise. If the U.S. growth slowdown proves not to be temporary and European periphery issues deteriorate further, the general selloff in risk assets could accelerate.”

It sure looks like that’s happening. And investors aren’t waiting around to see what happens. Powell says junk bond mutual funds saw $1.6 billion in outflows in just one week this month.

Meanwhile, ZeroHedge is down on the entire high-yield market, especially Greek, Irish and Portuguese bonds. However, he is particularly bearish on the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).

He says if the junk bonds continue to see heavy outflows “it will be hard for high yield to maintain current prices, particularly given how illiquid it currently is.” He says you can tell how illiquid they market has become by the haircuts both funds took last Thursday, when HYG fell 2%. As trading volumes in junk bonds fell and bid/ask spreads widened, institutional investors sold the ETFs rather than the actual bonds. With the liquidity at an extreme low, he says cut your high-yield risk, and is on the verge of shorting the ETFs.

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ETF Lets Investors Short High-Yield Bonds

ProShares today launched the first ETF that provides inverse exposure to the high-yield bond market. The ProShares Short High Yield (SJB) seeks to provide 100% the opposite daily performance of the Markit iBoxx $ Liquid High-Yield Index, before expenses. The ETF lists on NYSE Arca and charges an expense ratio of 0.95%.

Today’s volume was a measly 7,700 shares and the fund ended flat at its launch price of $40.

“High-yield bonds have had a strong rebound since the financial crisis, with indexes reaching all-time highs and high-yield funds attracting significant inflows over the past two years,” said Michael L. Sapir, chairman and CEO of ProShares Advisors in a written statement. “For investors who believe that high yield bonds are ripe for a pullback, SJB can be used to help hedge against or to seek to benefit from potential declines.”

The iBoxx $ Liquid High Yield Index has gained 12.6% over the past year, and 7.4% over the past three years on an annualized basis. It currently yields about 8%. To get the positive returns on this index check out the iShares iBoxx $ Liquid High Yield Corporate Bond Fund (HYG).

Inverse ETFs are not buy-and-hold instruments. As always, inverse funds only guarantee the inverse performance on a daily basis. That means if the market falls 10% over a three-month period, but experiences a lot of volatility during that time, you won’t necessarily receive a 10% return. For instance, ProShares UltraShort 20+ Year Treasury ETF (TBT) seeks to return twice the inverse daily performance, or 200%, of the Barclays Capital 20+ Year U.S. Treasury Index. In 2010, the index rose 9.38%, which means the ETF should have seen a return of negative 18.76%. However, because of volatility, the fund’s actual return was negative 26.32%.

This is ProShares’ fifth inverse bond ETFs. ProShares’ other four inverse bond ETFs are benchmarked to Treasury bonds. These include:

  • UltraShort 20+
  • UltraShort 7-10 Year Treasury (PST)
  • UltraShort TIPS (TPS)
  • Short 20+ Year Treasury (TBF)

These four ETFs have garnered more than $7 billion of assets since launching less than three years ago.