Skip to main content

iShares Launching A BB-Only Corporate Bond ETF

The new fund would target only the highest rated of the junk bond universe.

According to a new SEC filing, BlackRock is about to add another ETF to its iShares lineup.

The iShares BB-Rated Corporate Bond ETF (HYBB) would target only the highest rated tier of the junk bond universe. By targeting only BB-rated bonds, income seeking investors have an option that offers a high yield but also avoids some of the worst credit quality bonds.


The timing of the launch probably couldn't be much better. The junk bond market as a whole is down about 1% on the year, but that number underscores the risks inherent in the space right now.

We've seen dozens of credit downgrades and defaults as the coronavirus outbreak wreaks havoc on corporate financial viability. The A-rated to AAA-rated bucket has been mostly unaffected, but the BBB-rated category, which is the primary hunting ground of many investment-grade corporate bond ETFs, has seen several issuers slip into the junk bond category.

Despite this, credit spreads remain incredibly narrow, indicating that investors are not being properly compensated for the risk they're taking.

Still, investors are reaching heavily into high yield bonds in order to capture the yields they're not finding in Treasuries, stocks and other dividend-paying securities. The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) both yield around 4-5% right now. That's certainly appealing compared to the 0.7% you'd get from a 10-year Treasury bond, but look at the risk you'd be taking in buying here.

This is the current credit profile of JNK:

Screen Shot 2020-09-06 at 5.26.32 PM

Nearly half of the fund's assets are in bonds rated single-B and below.

Looking at long-term averages, the default rate on B-rated bonds is about 3%, but in the CCC-rated and below group that number soars to about 25%. During the peak of the tech bubble and financial crisis, those numbers were as high as 11% and 45%, respectively. Are those the kinds of numbers we're headed towards in the COVID economy? Hard to say, but it's certainly headed in that direction.

That's what makes HYBB appealing. It focuses strictly on the highest-rated bonds in the junk category. That certainly won't eliminate the possibility of default or downgrade risk, but it does avoid exposure to the riskiest bonds in the high yield universe. And that's more important right now than reaching for yield.

Based on the current yield of the index the fund will be based on, investors can expect a yield of around 4% minus fund expenses.

fredgraph (1)

The management fee according to the ETF's filing will be 0.25%, so investors can expect a yield of around 3.75%. Again, not as high as the 4-5% yield of the largest junk bond ETFs, but the lower risk will be the more appealing factor.

No word yet on when the fund will debut, but I suspect it will be sometime soon. Perfect timing for the current market.