Investors are starting to favor junk bond ETFs over investment-grade

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Investors searching for yield are increasingly turning to riskier corners of the market and one research firm thinks that’s a good strategy.

Inflows to exchange-traded funds holding below-investment grade debt, also known as “junk” bonds, are picking up steam, according to data from the firm, CFRA Research.

“Given how low yields are, we think the risk is warranted and rewarded,” Todd Rosenbluth, CFRA’s head of mutual- and exchange-traded fund research, told MarketWatch. “Given the likely economic improvement in 2021, and with interest rates so low, we think investors are wise to take on credit risk as they have been doing.”

Investors continue to pour money into bond ETFs of all kinds in 2020, with $66 billion flowing into corporate bond ETFs in the year to date, CFRA data show, nearly double the amount flowing into broad market of U.S. equities ($38 billion) or metals commodities ($37 billion.)

Top investment grade corporate bond ETFs
Name, ticker YTD return Assets 30-day SEC yield
iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -0.38% 8.5% $57 billion 1,90%
Vanguard Intermediate-Term Corporate Bond ETF VCIT, -0.22% 7.3% $38 billion 1.65%
Vanguard Short-term Corporate Bond ETF VCSH, -0.00% 4.0% $31 billion .90%
iShares Short-Term Corporate Bond ETF IGSB, -0.00% 4.1% $20 billion .92%
Sources: CFRA’s First Bridge Database, fund web sites

So far, 70% of that $66 billion has gone into investment-grade ETFs. But in the last month, CFRA data show, less than half of all corporate bond inflows have gone into investment grade funds.

Top high yield corporate bond ETFs
Name, ticker YTD return Assets 30-day SEC yield
iShares iBoxx $ High Yield Corporate Bond ETF HYG, -0.67% $30 billion 4.38%
SPDR Bloomberg Barclays High Yield Bond ETF JNK, +0.03% -0.80% $13 billion 4.77%
iShares Broad USD High Yield Corporate Bond ETF USHY, +0.06% 0.02% $5.7 billion 5.14%
iShares 0-5 year High Yield Corporate Bond ETF SHYG, -1.83% $4.8 billion 4.86%
Sources: CFRA’s First Bridge Database, fund web sites

Investors interested in junk bond ETFs should consider a few factors. The table above shows performance through August 21, and current 30-day SEC yield. Also, Rosenbluth said, with yields so low, the fund management fee becomes very important. “You want to pay as little to management as you can,” he said.

Indeed, his analysis shows that cheaper high yield ETFs are gaining ground on some of the bigger players in the market. The iShares iBoxx $ High Yield Corporate Bond ETF, the biggest fund and the one most likely used as a tactical trading tool by institutional investors, charges 40 basis points. A smaller competitor, the Xtrackers USD High Yield Corporate Bond ETF, HYLB, +0.00% which charges only 15 basis points, has seen roughly the same inflows over the past month.

Also of note: while there’s no guarantee of anything in any financial market, the Federal Reserve has been buying both corporate bonds and corporate bond ETFs in an effort to bring stability and liquidity to the market and some support to the overall economy.

Related:Bond ETFs jump as Fed wades into the market