When it comes to capturing yield in the corporate debt space, ETF investors are showing a preference this year for senior bank loans over high-yield corporate bonds. That preference, some argue, is largely due to what looks like an overvalued junk corporate bond segment, but it is a choice that has its trade-offs.
In a recent webcast discussing his views on the market, DoubleLine’s Jeff Gundlach pointed out that in 2014, he has opted for bank loans over high-yield corporates for that very reason: overvaluation in the high-yield segment. But as one advisor recently asked, “Is there any asset today that isn’t overvalued?”
The S&P 500 is up 200 percent from its March 2009 lows without serious signs of economic expansion; long-dated Treasurys are at multi-month highs, rallying in tandem with the stock market this year; and riskier fare such as emerging markets are in back in vogue. “Overvalued” could be a relative term these days.
Consider two ETFs as proxy for these separate segments:
iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and PowerShares Senior Loan ETF (BKLN | B).