In the world of exchange-traded funds (ETFs), there is a first-mover advantage. The issuer that’s first with an ETF that addresses a previously untapped market segment often finds success and can keep competitors at bay. Then there are market niches big enough for multiple ETFs, as with high-yield corporate bonds, and that’s where the SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) fits.
JNK is not the oldest junk bond ETF, nor is it the largest, but it is one of the most successful. When it comes to sheer size, this is the second-largest junk bond ETF behind the iShares iBoxx $ High Yield Corp Bond ETF (NYSEARCA:HYG).
SPDR’s junk-bond ETF debuted seven months after HYG in 2007, and the former now has $11.1 billion in assets under management — a more-than-respectable level among corporate bond ETFs.
A Viable Competitor
JNK, which tracks the Bloomberg Barclays High Yield Very Liquid Index, holds 820 junk bonds, about 200 fewer than rival HYG. None of JNK’s holdings account for more than 0.74% of the roster.
It also has a 30-day SEC yield of about 5.5%, which is enough to lure income-seeking retail investors into the ETF.
Additionally, JNK has a solid following among professional traders. There are some reasons for that latter trait, including robust liquidity, tight spreads and average daily dollar volume that exceeds $422 million.
Another reason pros like JNK is that there are times when the ETF’s tracking error, or its ability to mimic its underlying index, becomes wider than is seen in rival funds. Professional traders use that opportunity to short this SPDR ETF with the expectation that it will retreat in price to move back in line with its benchmark.
JNK’s modified duration is four years and its yield to maturity is 6.17%, according to issuer data. Just over 83% of the ETFs holdings are rated BB or B, but 16.4% carry the speculative CCC rating. CCC-rated junk bonds are nice when junk bonds themselves are in style, but if the asset class or issuers behind that lowly-rated debt fall out of favor, investors can suffer.
At the moment, top holdings include bonds from companies such as Sprint Corp (NYSE:S) and Western Digital Corporation (NASDAQ:WDC).
Over the past three years, JNK has trailed HYG in total returns but has made up for that with slightly less volatility.
This fund charges 0.4% annually, or $40 on a $10,000 stake, making it 9 basis points cheaper than HYG and one of the more cost-effective options in the junk bond ETF arena.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
