Stocks to Sell #5: iShares iBoxx $ High Yield Corporate Bond ETF (HYG) or SPDR Barclays High Yield Bond ETF (JNK)
Click to Enlarge If you own high-yield bond ETFs as anything but a long-term, core position, it’s time to consider looking for opportunities elsewhere. High yield has outperformed the rest of the bond market during the past year thanks to nearly ideal conditions: recovering economic growth, a low default rate and elevated investor risk appetites.
At this point, however, all of these factors are well-known … meaning the upside is capped.
It’s certainly possible that a continued risk-on environment will lead to slight price appreciation in iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK) above their coupons from now through year-end. Unfortunately, that’s about the limit of what investors can expect with absolute yields and yield spreads both deep on the low end of the historical range. At the same time, any negative surprise that causes risk appetites to evaporate could lead to meaningful downside.
And with yields already near record lows, there’s no longer much income to offset the downside risk.
Anyone who owns a longer-term position in high yield knows that it has paid to ride out the tough times. But for those who aren’t committed to the asset class for the next three to five years, this is an outstanding opportunity to trim your position.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.