Comparing leveraged loans and high yield bonds: Important ETFs

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Feb. 17 2014, Published 12:00 p.m. ET

Important ETFs

There are many ETFs that track the high yield bond market. The prominent ones are HYG and JNK, which collectively hold ~95% of the high yield bond ETF market share, and PHB.

There are also other shorter-dated versions, such as the SPDR series trust (SJNK) and PIMCO funds (HYS), which track the high yield bond market.

High Yield ETF

High yield bond ETFs

The iSharesiBoxx $ High Yield Corporate Bond ETF (HYG) seeks to replicate the total return before fees and expenses of the Markit iBoxxA USD Liquid High Yield Index. The ETF has a gross expense ratio of 0.50%. The largest holding on this ETF is Sprint Corporation (S), which accounts for 0.55% of the total ETF assets.

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The SPDR Barclays Capital High Yield Bond ETF (JNK) seeks to replicate the total return before fees and expenses of the Barclays Capital High Yield Very Liquid Index. The ETF has a gross expense ratio of 0.40%. The largest holding on this ETF is First Data, which accounts for 0.75% of the total ETF assets.

The Power Shares High Yield Corporate Bond ETF (PHB) seeks to replicate the total return of RAFIA Bonds US High Yield 1-10 Index. The ETF has a gross expense ratio of 0.50%. The largest holding on this is ETF is of The International Lease Finance Corporation, which accounts for 1.25% of the total ETF assets.

Leveraged loan ETFs

Leveraged loan ETFs are mainly limited to SNLN and BKLN. Both ETFs track the S&P/LSTA U.S. Leveraged Loan 100 Index, which is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weighting, spreads, and interest payments.

The Pyxis/iBoxxSenior loan (SNLN) seeks to replicate, before fees and expenses, the total return of the Markit iBoxx USD Liquid Leveraged Loan Index. The ETF’s expense ratio is 0.55%. The largest holding of this ETF is Caesars Entertainment (CZR), which accounts for 2.39% of total ETF assets

The Power Shares Exchange-Traded Fund Trust II (BKLN) seeks to replicate the S&P/LSTA U.S. Leveraged Loan 100 Index. The ETF’s expense ratio is 0.66%. The largest holding on this ETF is Asurion Corporation, a mobile phone insurance services provider, which accounts for 2.19% of total ETF assets.

Important considerations for investors

Mutual funds and exchange-traded funds (ETFs) are the medium through which retail investors can buy high yield bonds and leveraged loans. Returns on high yield bonds and leveraged loans have been very attractive versus other classes over the past two years. However, while considering buying one of these financial instruments, investors should pay close attention to the cost of owning these funds. Although high yield bonds and leveraged loans track the market index, their return could be quite different due to their expense ratio.

The expense ratio is expressed as a percent of assets under management and is composed of an investment advisory fee and administrative cost. The former is purely a manager fee, and it ranges between 0.5% and 1.0% of total fund asset annually. The latter is the cost of record keeping, mailings, customers, et cetera.

As an example, if an investor buys $5,000 of an ETF with an expense ratio of 0.44%, then the annual fee on the ETF will be $22.

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