
Here's Why Actively Managed High-Yield Bond Funds Beat ETFs
NEW YORK (TheStreet) -- Investors have poured nearly $9 billion into high-yield exchange-traded funds since the start of 2013. According to Gershon Distenfeld, director of high yield at AllianceBernstein, they'd have made more money using actively managed bond funds.
"The numbers tell the whole story. You don't have to give fancy arguments. These things have been around for almost a decade and they have well underperformed the average active manager," said Distenfeld.
According to Distenfeld's numbers, since the start of 2008, shortly after their inception, the two largest ETFs -- iShares iBoxx $ High Yid Corp Bond (HYG) - Get Report and SPDR Barclays Capital High Yield Bond ETF (JNK) - Get Report -- delivered annualized returns of 6.2% and 6%, respectively, well short of the 8.3% annualized return for the Barclays U.S. Corporate High-Yield Index. He adds that the top 20% of active high-yield mangers, as rated by Lipper, have also comfortably outperformed these two ETFs and have done it with lower volatility, as measured by risk-adjusted returns, and are not really much cheaper than active funds.
"The management fees are slightly lower. They are not the few basis points you find in the equity world. They are 40 and 50 basis point fees, but again, the numbers tell the whole story. Over eight years they have underperformed a high yield index by about 200 basis points and some of the top-tier managers by 300 or 400 basis points."
Regarding Carl Icahn's public statements that high-yield ETFs are dangerous due to their illiquidity and could cause a wider market meltdown, Distenfeld said the billionaire investor is likely not a fan of high-yield right now, no matter the vehicle.
"There are definitely benefits. They can add liquidity to the market. They can be used to hedge portfolios. There are some good uses of ETFs," said Distenfeld.
Current valuation of high yield bonds remain reasonable despite the fact that the market is getting later into the credit cycle. Relative to the rest of fixed income, he said high yield bonds are definitely worth owning as long as investors don't stretch too far for yield. Furthermore, he said worries that the sector will be brought down by a wave of energy issue defaults are overblown.
"We think defaults outside of energy are going to end up being lower than they otherwise would have because oil has fallen so much," said Distenfeld.








