Update: iShares $ High Yield Corporate Bond UCITS ETF

Die Stärke des Franken 2015 hat die Verluste bei Dollar-Hochzinsobligationen für Schweizer Anleger noch vergrössert. Mittlere Laufzeiten dominieren diesen breit diversifizierten ETF, in dem sich kaum Financials finden. 

Jose Garcia-Zarate 15.01.2016

Rolle im Portfolio

IShares USD High Yield Corporate Bond UCITS ETF offers broad-maturity exposure to the market of USD-denominated non-investment-grade corporate debt, irrespective of sector. Investors may consider this exchange-traded fund as a proxy for global exposure to this asset class, as the United States accounts for around two thirds of the global high-yield bond market.

Gaining exposure to the high-yield bond market is commonly thought of as a way of generating higher returns relative to other fixed-income instruments, or similar returns to equity holdings. The trade-off is one of much higher risk relative to investment-grade bonds. This means that expectations for a steady stream of income should be lower, as the risk of issuer default is comparatively higher.

The higher risk profile means that this ETF should probably be deployed as a satellite component within the fixed-income section of an investment portfolio.

As of this review, this ETF is the default choice for Europe-based investors seeking broad-maturity passive exposure to the US high-yield bond market. Its ongoing charge of 0.50% is above-average for this type of market exposure, albeit not by much. The fund has a fairly high level of assets under management.

Investors in fixed income need to take into consideration the risks to performance arising from inflationary pressures and their effect on monetary policy decisions. This ETF tracks an index with duration around the four-year mark. Europe-based investors considering this USD-denominated ETF should account for foreign-exchange effects on returns and should monitor the decisions taken by the US Federal Reserve.

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Fundamentale Analyse

Data from the Securities Industry and Financial Markets Association (SIFMA) show that high-yield bond issuance in the US in the first 11 months of 2015 totaled USD 256 billion. Although lacking one month for full calendar-year results, it seems highly likely that issuance in 2015 will be lower than the USD 312 billion placed in 2014. This would mark the second consecutive year of decline from the historical high of USD 335 billion placed in 2013. In any case, the figures remain well above the annual average USD 100 billion of the precrisis years.

Overall, the substantial increase in high-yield bond issuance since 2008 has been comfortably absorbed in an economic environment of ultralow interest rates. However, the slight decline in new issuance during the past two years could be foretelling of a change in sentiment for the asset class.

For starters, after much anticipation, the US Fed has now officially embarked in a policy tightening cycle. Increases in interest rates are likely to be very gradual and toward a level below the precrisis highs. In any case, this change in policy should weigh on US fixed-income valuations across the board, and it would likely push investors to seek safer alternatives in the space.

In addition, the US high-yield bond market has been subject to heightened volatility as a result of the collapse in oil prices since 2014. A fair number of high-yield bond issuers in the US are companies in the fracking industry for which the fall in oil prices can be likened to a torpedo aimed at their financial flotation line. Going forward, chances are that some of these companies may not be able to refinance debt, in turn triggering defaults that even if circumscribed to the energy sector would damage sentiment for the high-yield bond market as a whole.

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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. The bulk of issuance (80%-90%) is by nonfinancial corporations and tends to have medium-dated maturities. Around 90% of the index exposure is in bonds issued by US-domiciled corporations. To be eligible for inclusion in the index, bonds must have a minimum outstanding of USD 400 million, a minimum maturity of 1.5 years, and a maximum maturity of 15. Only fixed-rate bonds with a sub-investment-grade rating are eligible for inclusion. The index is weighted by market capitalisation, subject to a 3% cap per constituent. The cap rises to 10% in the case of 144A bonds (that is bonds not registered with the US SEC and sold only to qualified institutional buyers). The index is calculated on a total-return basis using consolidated prices derived from bid-ask quotes provided by contributing banks. The index is rebalanced on a monthly basis at the last business day of the month. Bonds with remaining maturity below one year at the time of rebalancing are removed from the index. Intra-month cash from coupons and partial redemptions are held as nonaccruing cash until the next rebalancing, when is then 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 semiannual 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, such as duration, currency, country, rating, and 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 suffer from illiquidity. According to our research, the extent of sampling for this ETF has tended to be very limited. The ETF regularly holds a similar number of components as the index. IShares engages in securities with the holdings of the ETF. BlackRock acts as investment manager on behalf of iShares. The ETF can lend out up to 100% of net asset value. The average on loan for this ETF in the 12 months to the end of September 2015 was 2.2% for an annualised return of 2 basis points. Lending operations are backed 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 112.0%. Lending revenue is split 62.5/37.5 between the ETF and BlackRock, respectively.

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Gebühren

The annual ongoing charge is 0.50%. This is at the top end of the range for European-domiciled ETFs providing exposure to the USD-denominated high-yield bond market. Additional costs potentially borne by investors and not included in the ongoing charge 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

As of this review, there are no ETFs in the European marketplace offering like-for-like exposure to the iShares fund. Investors would either have to compromise in terms of maturity exposure or contemplate a global, rather than US-centric, approach to investing in this asset class.

Measured in AUM terms, the most popular alternative to this iShares ETF is PIMCO Source Short-Term High Yield Corporate Bond ETF. This physically replicated ETF offers exposure to the 0-5 maturity segment of the USD-denominated high-yield bond market. The ETF comes in both unhedged and currency-hedged share classes that levy ongoing charges of 0.55% and 0.60%, respectively.

Lagging in AUM, iShares and SPDR also offer ETFs focusing on the same maturity segment with charges of 0.45% and 0.40%, respectively.

Other alternatives, such as iShares Global High Yield Bond ETF (0.55%) and BMO Barclays Global High Yield ETF (GBP hedged, 0.50%) track indexes that measure the performance of the global high-yield bond market, thus combining USD and EUR-denominated issues. USD bond exposure usually account for around 70% to 80%. 

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Über den Autor

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