Update: iShares $ High Yield Corporate Bond UCITS ETF

Steigen in den USA die Zinsen, kann das ein Warnsignal für Hochzinsbonds sein. Allerdings ist deren Zinssensitivität im Allgemeinen geringer als bei Qualitäts-Anleihen. Die jüngste Korrektur bietet zudem angesichts der soliden Nachfrage nach Zinsprodukten die Aussicht auf Spread-Einengungen.

Jose Garcia-Zarate 31.07.2015

Rolle im Portfolio

The iShares USD High Yield Corporate Bond UCITS 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 asset class have to accept the trade-off of much higher notional risk relative to investment grade corporate debt. This means that expectations for a steady stream of income should be lower while the risk profile will 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. Investors with a particular high tolerance to risk may see high yield as their preferred asset to meet their exposure requirements to corporate bonds. Some investors may consider this ETF as a proxy for global exposure to this asset class, as the US accounts for around two-thirds of the global high yield bond market. Irrespective of whether the ETF plays a core or tactical role, the overall weight of this asset class within a portfolio should not be particularly large.

European investors considering this USD-denominated ETF should account for foreign exchange effects on returns. 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 2014 (note – this accounts for around 90% of global USD-denominated high yield bond issuance) totalled USD 312bn, slightly down from the historical high of USD 335bn placed in 2013, but still well above the average USD 100bn placed annually in the pre-crisis years. High yield bond issuance in the first half of 2015 stood at USD 180bn. 

This substantial increase in high yield bond issuance has been easily absorbed in 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.

Indeed, under these conditions, many non-investment grade corporations have found a relatively easy source of funding in the open market. In many cases, this 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 and credit spreads (i.e. the yield difference to US Treasuries). All things considered, the US high yield bond market continues to offer a tasty pick-up over US Treasuries. Ultimately, however, these are bonds subject to a high degree of risk. For example, the collapse in oil prices in H2 2014 weighed heavily on performance of high yield bonds, as many of the issuing companies were involved in the energy sector.

For many years, the US high yield bond market has found fundamental support in the US’s ultra-loose monetary policy settings. However, the path of least resistance for bond yields only points north. In fact, fixed income dynamics in 2015 are telling of a market increasingly wary of a change in the cycle (i.e. increases in interest rates in the US) and this has weighed on US bond valuations overall. Fed Funds have been held in a 0.00-0.25% target range since December 2008. Any increases in interest rates are likely to be very gradual and towards a level below the pre-crisis highs. In any case, this change in policy should continue weighing on US fixed income valuations.

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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. The bulk of High Yield issuance (e.g. 80-90%) is by non-financial corporations and tends to have medium-dated maturities. Around 90% of the index value is in bonds issued by US-domiciled corporations. 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 distributes dividends on a semi-annual basis, with the historical data so far showing a May-November payment pattern. iShares uses stratified sampling to construct the fund. The index is broken down into sections, each representing key risk factors (e.g. duration, currency, country, rating, sector). The managers then choose bonds included in the index that mimic the risk profile of each section. The aggregate result is a portfolio that represents the index’s overall risk profile, while allowing the ETF manager to avoid purchasing bonds that may suffer from illiquidity. According to our research, the extent of sampling for this ETF has tended to be very limited, with the ETF regularly holding a similar number of components as the index. 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 ETF can lend out up to 100% of NAV. The average on-loan for this ETF in the year to end March 2015 was just over 2%. 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 62.5/37.5 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 like-for-like, the most popular alternative to this iShares ETF is the PIMCO Source Short-Term High Yield Corporate Bond ETF. This physically replicated ETF tracks the BofAML 0-5y US High Yield Constrained Index and charges a TER of 0.55% for the unhedged version and 0.60% for the EUR-hedged version. Investors in the PIMCO Source ETF restrict exposure to the short-to-medium maturity segment, including bonds with maturity below one year, which are not part of the index tracked by the iShares ETF. This may have implications in terms of pricing dynamics of these bonds.

 

The SPDR Barclays 0-5 USD High Yield Bond ETF also focuses on the short-to-medium maturity segment of the market. The SPDR fund is physically replicated and charges a lower TER at 0.40%. As of this writing, it lags both iShares and PIMCO Source funds 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.