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%. “It’s a fundamentally similar ETF. Mutual funds and ETFs have the same portfolio managers, the same investment objectives. It’s really about giving investors more options so they can get it in the structure that makes the most sense. Jay Jacobs, U.S. head of strategy for BlackRock’s thematic and active ETFs, said the ETFs are cheaper than mutual funds, with an expense ratio of 0.45%, compared with the 0.93% expense ratio for Class A shares of the old product, which is institutional. The category’s expense ratio is 0.58%. Other recent launches include the John Hancock High Yield ETF (JHHY), the Invesco BulletShares 2032 High Yield Corp. ETF (BSJW), and the BlackRock fund. AB Short Duration High Yield ETF (SYFI) (Transformed from Mutual Fund) The new products come as the next step for high-yield bonds is unclear as U.S. Treasury yields fall in June and the Fed is expected to do so. With rate cuts set to begin later this year, investors who have already tasted yields of 5% or higher may turn to funds with higher payments, but if rate cuts are accompanied by signs of a recession, it could cause high-yield bond prices to rise. The decline comes as default risks rise. In bond traders’ terms, that means the spread between risky debt and safe debt will widen, and high-yield investors say the sector remains fundamentally sound, at least for now. Michael Schlembach, managing director and senior portfolio manager at Marathon Asset Management, compared high-yield borrowers to U.S. consumers holding long-term debt such as mortgages, which the Fed “The combination of rising coupons and the legacy benefits of lower interest rates has been good for business fundamentals over the past few years,” Schlenbach said. 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.
