Analyse/iShares $ High Yield Corporate Bond

In Zeiten stetig sinkender Bond-Renditen werden Hochzinspapiere zunehmend interessanter auch für konservativere Anleger. Allerdings ist auch hier angesichts der zusammengelaufenen Spreads die Aussicht auf Kursgewinne durchwachsen.

Jose Garcia-Zarate 04.06.2014

Rolle im Portfolio

The iShares USD High Yield Corporate Bond ETF offers investors exposure to the USD-denominated market of non-investment grade corporate debt. Gaining exposure to the high yield corporate bond market is often thought of as a way to generate higher returns relative to better credits. However, investors in this particular asset class will have to accept the trade-off of much higher notional risk vs. investment grade corporate debt. This means that expectations for a steady stream of income should be lower while the risk profile (e.g. default is not a rare occurrence in high yield) should be higher.

The combination of a substantial yield pick-up and a higher risk profile means that this ETF is probably best deployed as a satellite component within the fixed income section of an investment portfolio. Some investors with a particular high tolerance to risk may see high yield as their preferred asset to meet their exposure requirements to corporate bonds, while others may see an ETF tracking the performance of the USD-denominated high yield bond market as better capturing the essence of the this particular asset class given that globally, high yield bond issuance is largely undertaken by US-based corporations. Irrespective of whether the ETF plays a structural or tactical role, we would argue that the overall weight of this asset class within a portfolio is unlikely to be of a great magnitude. 

European investors considering this ETF should also take into consideration that it is a USD-denominated instrument and should account for the effect on returns via foreign exchange gyrations. In addition, investors would be advised to keep track of monetary policy decisions undertaken by the US Federal Reserve and the effect these may have on the value of this fixed income investment. This ETF tracks an index with duration around the four year mark.

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Fundamentale Analyse

The USD-denominated high yield bond market has experienced significant growth over the past few years. Figures from the Securities Industry and Financial Markets Association (SIFMA) show that high yield bond issuance in the US in 2013 (note – this accounts for around 90% of global USD-denominated high yield bond issuance) hit a new historical high at USD 336.1bn, up 2% y/y from 2012. Meanwhile, issuance in Q1 2014 has totalled USD 70.7bn. This represents a 22% y/y decline over the same quarter in 2013. However, overall, it was a solid figure by historical standards.

This substantial increase in high yield bond issuance has been supported by an economic environment of ultralow interest rates. This has boosted investor demand for fixed income asset classes away from the very safe but very low-yielding investment propositions that US Treasuries have become. 

The increase in the recourse to the open market at low interest rates has allowed many non-investment grade corporations a relatively easy source of funding over the past few years. In many cases, this funding has been to refinance existing debt commitments. As a result, we have seen an extension of debt maturities that has been instrumental in the remarkable decline rates of defaults in the high yield bond market. 

Despite the noted increase in supply, demand for USD-denominated high yield bonds has regularly outstripped it. This has led to a considerable compression in yields (e.g. average yields in April stood at 5.25% vs. 9.0% at end 2009). We have also seen narrowing of credit spreads (i.e. the yield difference to US Treasuries). However, all things considered, the US high yield bond market continues to offer a tasty pick-up over US Treasuries. 

Despite the improving economic outlook in the US, the Federal Reserve (Fed) remains committed to a very accommodative conventional monetary policy stance for a protracted period. Fed Funds have been held in a 0.00-0.25% target range since December 2008, and are likely to remain unchanged for a protracted period, even after unconventional measures such as QE comes to an end. As of this writing (e.g. early May 2014), the Fed has reduced the level of monthly asset purchases by USD 40bn to USD 45bn, with further reductions expected throughout 2014.

Against this brackdrop, chances are that positive financing conditions for corporations – and low default rates – will remain key factors underpinning the US high yield bond market for the foreseeable future. However, investors gaining exposure to the high yield bond market should bear in mind that these are not normal conditions. The eventual normalisation of policy (e.g. higher interest rates), whenever it may happen, could trigger mean-reversion (e.g. an increase towards historical averages) both in yields and default rates for high yield bonds. This, however, remains a somewhat distant prospect as we write.

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Indexkonstruktion

The Markit iBoxx USD Liquid High Yield Capped Index measures the performance of the most liquid USD-denominated non-investment grade corporate bonds issued by corporations located in developed economies. To be eligible for inclusion in the index the bonds must have a minimum outstanding of USD 400mn, minimum maturity of 1.5 years and maximum of 15. This is a market capitalisation index which for diversification purposes caps individual bond’s weight within the index at 3% or 10% in the case of 144A bonds (e.g. bonds not registered with the US SEC and sold only to qualified institutional buyers). Only fixed rate bonds with a sub-investment grade rating are eligible for index inclusion. The index is calculated on a total return basis using consolidated prices based on bid/ask quotes provided by contributing banks. The index is rebalanced on a monthly basis at the close of the last business day of the month. Bonds with remaining maturity below one year at the time of rebalancing are removed from the index. Payments from coupons and partial redemptions are held as non-accruing cash until the next rebalancing, when they are reinvested in the index.

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Fondskonstruktion

iShares uses physical replication to track the performance of the Markit iBoxx USD Liquid High Yield Capped Bond index. The ETF was launched in September 2011 and is domiciled in Ireland. The ETF distributes dividends on a semi-annual basis, with the historical data so far showing a May-November payment pattern. The ETF manager uses a degree of statistical sampling in order to construct the fund. At close inspection, the difference between the index and ETF baskets as it pertains the number of constituent bonds has tended to be minimal. In fact, a snapshot as of this writing (i.e. early May 2014) showed that fund and index roughly had the same number of components (e.g. around 900). In that sense, the notion of statistical sampling is perhaps best understood as leeway for the ETF manager when it comes to allocation of statistical weights to individual bonds and/or issuers. It may also be the case the ETF basket contains bonds not included in the index. However, this practice is likely to be very limited and would in any case match the index’s key risk factors. The bulk of High Yield issuance (e.g. 80-90%) is carried out by non-financial corporations and tends to have medium-dated maturities. This is duly reflected in the fund’s composition by sector. Meanwhile, with regards to geographical exposure, around 90% of the ETF’s components are bonds issued by US-domiciled corporations, with the remaining 10% split into a large number of countries. All bonds are USD-denominated. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent out is capped to 50% of AUM per fund, although in most cases it stands well below that level. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.

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Gebühren

The total annual expense ratio (TER) is 0.50%. This seems to be average for ETFs providing exposure to the high yield corporate bond market. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares. There are also rebalancing costs whenever the index changes composition.

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Alternativen

Although not a like-for-like, the most popular alternative to this iShares ETF is the PIMCO Short-Term High Yield Corporate Bond Source ETF. This physically replicated ETF charges a TER of 0.55% and tracks the BofAML 0-5y US High Yield Constrained Index. Investors in this PIMCO Source ETF would thus be restricting exposure to the shorter-end of the maturity spectrum, including bonds with maturity below one year, which are not part of the index tracked by the iShares fund. This may have implications in terms of pricing dynamics of these bonds. 

Similarly to the PIMCO Source ETF, the SPDR Barclays 0-5 USD High Yield Bond ETF also focuses on the short-to-medium maturity segments of the market. The SPDR fund is also physically replicated and charges a lower TER at 0.40%. However, as of this writing, it lags both the iShares and PIMCO Source funds by a substantial measure in AUM terms.  

Other European-domiciled alternatives would require investors to adopt a flexible approach with respect to market exposure as they track indices measuring the performance of the global high yield bond market, thus combining USD and EUR-denominated issues. For example, the iShares Global High Yield Bond ETF tracks a benchmark with 70-75% USD-denominated exposure and around 25% EUR-denominated. This ETF is offered in unhedged and hedged (EUR, GBP and CHF) versions. 

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Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.