Over in the US, the ETF market is well-established. Investors on the other side of the pond can chose from a range of ETFs in almost every sector of the equity market. Meanwhile, the fixed-income side offers ETFs based on government bonds of various maturity bands through to muni’s, corporates, emerging markets and high-yield baskets.
Over in Europe, we have some catching up to do and thus I am pleased to see iShares have brought out a new Euro High Yield ETF. This new ETF effectively mirrors the structure of its US equivalent, the iShares IBOXX $ High Yield Corporate Bond fund (HYG), a successful fund that has over $6 billion under management.
In order to create the new European version, iShares and index provider IBOXX have created a new index of Euro-denominated sub-investment grade bonds (i.e. bonds with ratings below BBB-). There are 150 bonds in this newly-created index, which should give adequate diversification. As an added precaution, the fund also has a 5% cap on exposure to any one issuer, which is good to know.
Here’s a summary of the new ETF
- Name: iShares Markit iBoxx Euro High Yield ETF
- Ticker: SHYG (GBP quote). Also available in EUR quote (IHYG)
- ISIN: IE00B66F4759
- TER: 0.5% p/a
- Tracks the new Markit iBoxx High Yield on a sampling basis (holds circa 100 physical bonds)
- Maturity of holdings 2-10 years
- Yield to maturity: 6.9%
- Duration: 3.3 years
- Dividends; semi-annual
- ISA/SIPP eligible: yes
Thus, another useful tool for fixed income investors. ETFs are liquid, have built-in diversification and are usually offered on much lower cost structure than a traditional managed fund. But the question is; should we buy the high-yield sector at the moment?
Perhaps the first thing to consider is the currency risk. This fund holds Euro denominated assets and a sterling-based investor will find the fluctuations in the GBP/EUR exchange rate will likely exceed the volatility of the fund itself. The second point is more oblique - the return on high-yield and sub-investment-grade bonds has been dragged lower by the low rates offered by cash and government bonds. This is understandable - investors who are only receiving one or two percent return on their capital will naturally slip down the credit curve in search of return. The problem is, whilst the level of return has diminished, the level of risk has not. Indeed, the current weak economic outlook suggests that default rates may well rise.
My view: I am not convinced that the claimed 6-7% YTM offered by this vehicle is particularly attractive. Nevertheless, the instrument is a welcome addition to the growing stable of fixed income ETFs and will be worth monitoring. Sub-investment grade bonds can show very high volatity and there will be a point in time, perhaps after some unexpected shock in the markets, where this ETF will provide excellent value. One to watch.
Mark Glowrey
