SJNK - SHYG: Good Fund But Credit Risk Is Still Questionable Now

2023-11-01 14:15:21 ET

Summary

• Junk debt issuers face refinancing risk into "higher for longer" rates.
• iShares 0-5 Year High Yield Corporate Bond ETF provides access to high yield with less duration risk.
• SHYG holds a diversified portfolio of short-term high-yield bonds with predominantly BB and B credit ratings.

I've sounded the alarm on junk debt over the last several months given the disconnect between credit spreads and bankruptcies rising. I do think we are on the cusp of a sudden realization that many junk debt issuers face refinancing risk into "higher for longer" rates. Having said that, investors still want access to this part of the bond market. The iShares 0-5 Year High Yield Corporate Bond ETF ( SHYG ) is a good way to access high yield with less duration risk.

What is SHYG?

SHYG is managed by BlackRock Fund Advisors. It seeks to track the performance of the Markit iBoxx USD Liquid High Yield 0-5 Index, a benchmark that provides market-value-weighted exposure to U.S. dollar-denominated, high-yield corporate bonds with less than five years remaining to maturity.

High-yield bonds, colloquially known as "junk bonds," are bonds issued by companies with lower credit ratings. These bonds offer higher yields to compensate for the additional risk. By investing in SHYG, investors gain exposure to a diversified portfolio of these high-yielding, short-term corporate bonds. The fund's focus on short-term bonds mitigates interest-rate risk compared to high-yield funds with longer duration bonds.

A Closer Look at SHYG's Holdings

As of the most recent data, the ETF holds 896 individual bonds, making it a truly diversified investment tool. The largest holdings in the fund's portfolio include bonds issued by Ford Motor, TransDigm, Teva Pharmaceuticals, and Dish. Notice the weightings are very small for the top 10.

The fund’s holdings are spread across various sectors, with the most significant exposure in the Consumer Cyclical sector, followed by the Communications and Energy sectors. This sector allocation provides a balanced exposure to various industries, thereby spreading the risk. Just keep in mind if we enter a recession, these sectors likely get hurt the most economically.

Maturity and Credit Quality

The fund primarily holds bonds with maturities ranging between 3-5 years, aligning with its investment objective of investing in short-term high-yield bonds. In terms of credit quality, the fund's holdings are predominantly rated as BB and B, which are considered non-investment grade or "junk" ratings. However, these lower-rated bonds are the primary source of the fund's high yield.

SHYG vs. Peers: A Comparative Analysis

When comparing SHYG with other high-yield bond ETFs, two notable competitors are the PIMCO 0-5 Year High Yield Corporate Bond Index ETF ( HYS ) and the SPDR Bloomberg Barclays Short Term High Yield Bond ETF ( SJNK ).

While SHYG, HYS, and SJNK all invest in high-yield bonds with a focus on shorter maturities, there are some differences. HYS and SJNK have a higher expense ratio compared to SHYG, which might impact the net returns for investors. Moreover, the credit quality and sector allocation of these ETFs also vary, affecting their risk-return profiles. Having said that, the funds largely perform similarly.

Balancing High Yield with High Risk

The bottom line? The iShares 0-5 Year High Yield Corporate Bond ETF offers a lucrative solution for investors seeking higher income. However, the potential for higher returns comes with higher risk, particularly in the form of credit risk and market volatility. I would myself hold off on a longer-term allocation here. The risk around refinancing into higher rates is real, and not factored in yet.

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