High-Yield ETF Performed Well Amid Turmoil

Last September, I wrote about the iShares iBoxx $ High Yield Corporate Bond Fund(HYG Quote), comparing it with Blackrock High Yield Trust(BHY Quote), Dreyfus High Yield Strategies(DHF Quote) and Blackrock Corporate High Yield III(CYE Quote), which are all closed end funds.

A reader question led me to realize that now might be a good time to revisit the issue, since the market situation has changed so much.

Investors can access high-yield bonds through traditional mutual funds, closed-end funds, this ETF and individual issues. Individual issues can be difficult for do-it-yourselfers because of issuer risk and liquidity risk, so that leaves a fund of some sort as the most likely choice.

The general thesis of the article was that HYG, because of the nature of ETFs, would be a less volatile way into the high-yield market than most closed-end funds.

Closed-end funds have a set amount of shares, so the market price can deviate from the net asset value. In times of extreme swings in market sentiment, closed-end bond funds can fall much more than people expect. ETFs can create or redeem shares based on demand, so the fund's market price stays much closer to the NAV.

There would be times where that extra volatility would be a good thing and times, like last September, where it would not be a good thing. I was concerned in that article about the economic cycle and the stock market cycle each ending which, if correct, would normally be a bad time to increase volatility. Typically, it would make sense to decrease volatility.

As the chart shows, HYG has held up better, and practically sat out the panic that occurred in mid-March, than the CEFs since that article was published. The result should not be interpreted as HYG being better, but more correctly, better-suited to the end of the cycle, which happened to coincide with an unusual dislocation in the interest rate market.