Funds and etfs

Junk Bond ETFs Just Sent an Important Signal to the Market

Investors began the year seeking out safe-haven investments in defensive assets and sectors, but the tide appears to be changing with high-risk trades back in vogue. Junk bonds – a leading indicator of investor willingness to take on risk – have attracted massive inflows with junk bond exchange-traded funds (ETFs) rising more than 3% over the past 30 day period.

Junk bond ETFs are on track to draw in nearly $4 billion in capital inflows, according to data from Markit, as investors take on risk for higher yields. The iShares High Yield Corporate Bond ETF (HYG) has been one of the biggest beneficiaries with shares rising more than 3% over the past 30 days, while the SPDR Barclays High Yield Bond ETF (JNK) rose an even greater 3.16% before losing some steam early this week.

With rebounding oil prices and lower odds of a rate hike following the ‘Brexit’, investors are growing increasingly confident in the health of the U.S. economy. The S&P 500 and many other major indexes have reached record highs over the past few weeks in a demonstration of this confidence, especially as investors shift capital allocation away from defensive sectors and into growth sectors that have seen lackluster growth so far this year.

Other analysts point to the fact that near-record low interest rates around the world could be more responsible for the sudden increase in junk bonds. With municipal bonds and other safe-haven fixed income classes yielding very little, junk bonds have become more appealing in terms of their risk-adjusted yields. They offer juicy yields in an environment where equities may be overvalued but the economy appears healthy – a proposition that’s hard to beat.