Junk bond ETF´s HYG, JNK a sell ?

Discussion in 'ETFs' started by ASusilovic, Oct 5, 2010.

  1. What's your view on Equities?
  2. I am waiting for the next flash crash.
  3. Chagi


    I would love to allocate a bit of the money in my portfolio to this asset class, but not at these levels...
  4. 007Arb


    Junk bonds as per their proxy the Merrill Lynch High Yield Master II Index has been hitting all time historical highs throughout this year. There have been streaks of 10 and 20 days in a row at times this year where it has been one historical high after another.

    Default rates among junk bond companies have come to a crawl. The default rate is running at an annualized rate of under 1% through the first eight months of this year according to J.P Morgan. It reached over 13% at its peak.

    Junk bonds are still trading at spreads above their historical norm with Treasuries so there is still gas left in the tank.

    Also, if you like this asset class much better to use an open end junk bond mutual fund than an ETF such as HYG, JNK, or PHB.
  5. Any particular reason?

    Also, don't you think Treasuries are a bad comparison because they are rallying on Fed purchases rather than economic outlook. Wouldn't the junk to AAA spread be a better valuation indicator?
  6. 007Arb


    The spread between Treasuries and junk bonds has been the benchmark spread since 1980 and one of the primary valuation tools for junk bonds. The other primary valuation tools are default rates and mutual fund flows. You seldom see any reference to the junk to investment grade spread. Still, it's worthwhile. If anything it just makes junk more compelling now because it is wider than normal as investment has been dragged along with Treasuries even more than junk. If Treasury rates rise it will effect investment more than junk because of the wider differential.

    As for why not the junk ETFs, and this is just me, among other reasons look at how they underperformed in 2009 vs. the average open end junk fund. Also, there is too much intraday noise from stocks, especially on the rout days, effecting the ETFs. I have seen days where the ETFs have declined 1% to 2% yet where the cash junk bond market was up as were the open end. Being a trend trader who prefers peristent non-volatile trends, the open end are much better for me because I can put on much larger positions.
  7. If QEII stumbles even just a tiny bit, this is poised to unwind.