JNK SPDR Bloomberg High Yield Bond ETF

Van Eck, the New York-based ETF issuer best known for its commodity focused funds such as MOO and GDX, recently debuted another new product, this time in the high yield bond space.  This new ETF will mark the company’s 11^th fixed income fund overall and it looks to help the firm expand more in the international space as well.

The fund, the Market Vectors International High Yield Bond ETF (IHY), looks to track the BofA Merrill Lynch Global ex-US Issuers High Yield Constrained Index (HXUS). This benchmark is comprised of below investment-grade debt issued by corporations located throughout the world (which may include emerging market countries) excluding the United States denominated in Euros, U.S. dollars, Canadian dollars or pound sterling issued in the major domestic or Eurobond markets (read Go Local With Emerging Market Bond ETFs).

The ETF will charge investors 40 basis points a year in fees and could help to finally open up the international high yield market to ETP investors. In fact, IHY is currently the only fund to target the international junk bond space and is just the 11^th ETP overall to focus on the market segment (included leveraged and inverse funds).

This lack of competition could result in decent inflows in the space especially given the popularity of other high yield bond ETFs. Currently, two funds have well over $10 billion in AUM—HYG and JNK—while another three have more than $250 million. Meanwhile, in the international Treasury bond ETF market, there are currently two ETFs with more than a billion in assets, suggesting that there could be great demand for a product that bridges these two popular spaces (see The Guide To China Bond ETFs).

IHY In Focus

The ETF looks to allow investors to diversify their high yield exposure across geographies while potentially allowing for higher yields and lower default risks as well. Additionally, due to the structure of the high yield bond market, most notes have a relatively low duration risk suggesting that if rates rise this fund should do better than most.

In fact, all of the product’s holdings mature in less than 10 years giving the index an average modified duration of just over four years.

In terms of credit quality, IHY focuses on higher quality non-investment grade bonds, allocating just 6.5% of the portfolio to bonds rated ‘CCC’ or lower. Instead, ‘BB’ bonds make up nearly 60% of the portfolio while ‘B’ rated securities comprise the rest (read Is The Bear Market For Bond ETFs Finally Here?).

Despite this focus on relatively high quality securities and the low duration, the underlying index does have a pretty solid yield. The benchmark sees an average yield to worst of about 8.3% while the average coupon is 7.7%. As a point of reference, HYG sees an annual yield of about 7.3% so it appears as though IHY will favorably compare from this perspective (also read Forget About Low Rates With These Three Bond ETFs).

Additionally, investors should note the fund’s breakdown among sectors. Financials make up about 21% of the total while utility bonds comprise another 5% of the product. Beyond these securities, industrials, services, and energy take the top three spots from an ‘industrial’ perspective.

It is also worth pointing out how diversified the underlying index is from a currency perspective as well. Bonds denominated in U.S. dollars comprise about 55% of the benchmark while euro denominated bonds make up another 38%. This leaves close to 7% for bonds that are in Canadian dollars and British pounds, a factor that should help with overall diversification (see The Best Bond ETF You Have Never Heard Of).

High Yield Bond ETF market

Currently, the high yield bond market is becoming extremely popular with investors from an asset inflow perspective. HYG and JNK have combined to reel in more than $6 billion in AUM so far in 2012 while the products have added nearly $20 billion combined in the past three year period as well. Given these impressive figures and the increased focus on international investing by many, we could see solid inflows into IHY as well, especially if trading volumes pick up and default rates remain low in this intriguing space.

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