After last month’s bond market selloff, many investors are hunting for strategies that can still provide high yields but won’t get hurt by rising interest rates.
Increasingly, they are turning to exchange-traded funds focused on short-term junk bonds, which promise those investors just what they are looking for.
Pacific Investment Management Co.’s Pimco 0-5 Year High Yield Corporate Bond ETF soaked up $602 million since the start of May, just as rates started to tick higher, according to IndexUniverse. The SPDR Barclays Short Term High Yield Bond ETF took in $318 million.
At the same time, investors are heading for the exits in longer-term high-yield bond funds.
The iShares iBoxx $ High Yield Corporate Bond ETF saw outflows of $1.4 billion since May. State Street Global Advisors’ SPDR Barclays High Yield Junk Bond ETF lost $1.8 billion.
Shorter-term ETFs have proved the better option during the latest bout of market duress. Both styles of junk-bond ETFs lost ground last quarter, but the short-term variety’s declines are less severe.
The Pimco 0-5 Year High Yield Corporate Bond ETF and the SPDR Short Term High Yield ETF lost less than 1%, including coupons dividends, in the second quarter, according to Morningstar. The iShares and State Street longer-duration funds, meanwhile, declined more than 2%.
And so far in 2013, the short-term funds returned more than 1%, while their counterparts are in the red.
“Shorter-term junk bonds are lower volatility, so in a downdraft there’s a lot less downside than regular junk bonds,” said Chun Wang, co-portfolio manager at Leuthold Weeden Capital Management, an investment manager based in Minneapolis. Continue reading