Recent Net Outflows Take a Toll on the Assets of the Largest High Yield ETFs

As investors have become skittish about the risk/reward tradeoff in high yield funds over the last four weeks, the largest exchange-traded funds (ETFs) in the segment have seen a significant decline in their asset base as net outflows have spiked. The week ended August 6, 2014, saw the second largest net outflows on record for high-yield ETFs as $1.279 billion exited. The largest net outflows for Lipper’s relatively new High Yield ETF segment occurred during the week ended June 5, 2013, at $1.426 billion, when concerns about the Federal Reserve’s plan to wind down its quantitative-easing program were at the forefront. The High Yield mutual fund classification has also witnessed substantial net outflows recently, with a record $5.788 billion exiting for the week ended August 6, 2014.

When measured against the beginning-period asset base on July 9, 2014, the net outflows that occurred over the ensuing four weeks have contributed to the asset bases of the largest ETFs declining by 4.3% for Barclays Short Term High Yield Bond ETF (SJNK) to 20.0% for Peritus High Yield ETF (HYLD). The largest high yield ETF by net assets is iShares iBoxx High Yield Corporate Bond ETF (HYG), which had an asset base on July 9 of $13.7 billion and has since declined 12.9% due to net outflows. When the impact of the change due to market action is included the asset base for HYG stood at $11.7 billion as of August 6.

The net flows of ETFs tend to be reflective of the activity of institutional investors and do not necessarily coincide with that of mutual fund investors. However, since both segments have witnessed substantial net outflows recently, it bears watching to see if the trend will continue. If so, it will have broad implications for the wider non-investment-grade corporate bond market going forward.

Against the very favorable backdrop for high yield bonds of a global search for yield, a slowly improving domestic economy, and a declining default rate, it is still worth noting that following the most recent periods of four or more consecutive weeks of net outflows from the High Yield ETF segment, the market—as measured by the BofA Merrill Lynch U.S. High Yield Master II Index—performed relatively well in the calendar month that immediately followed:

January 2014: +2.00%

September 2013: +0.99%

July 2013: +1.88%

March 2013: +1.03%

November 2012: +0.74%

July 2012: +1.74%

July 2011: +1.21%

July 2010: +3.46%