A spate of new funds focused on high yield debt have hit the ETF market in recent months at a time when riskier corporate bonds are at a crossroads. The latest fund to join the race is the BlackRock High Yield ETF (BRHY) , which debuted Tuesday. The managers for the fund also helm the BlackRock High Yield mutual fund, which has a four-star rating from Morningstar and a yield of roughly 6.5%. “This is a substantially similar ETF. The mutual fund and the ETF [have] the same portfolio manager, same investment objective. And it’s really about extending choice to investors so that they can get access to the strategy in what structure makes the most sense to them,” said Jay Jacobs, U.S. head of thematic and active ETFs at BlackRock. The ETF is cheaper than the mutual fund, with an expense ratio of 0.45%, compared to 0.93% for the A-class shares of the older product or 0.58% for the institutional class. The BlackRock fund is one several new high yield ETFs. Other recent launches include the John Hancock High Yield ETF (JHHY) , an Invesco BulletShares 2032 High Yield Corp. ETF (BSJW) , and the AB Short Duration High Yield ETF (SYFI) , which was a conversion from a mutual fund. The new products come as the next steps for high yield debt are unclear. With Treasury yields falling in June and the Federal Reserve expected to begin rate cuts later this year, investors who have gotten a taste of yields 5% or higher might look to migrate to funds with bigger payouts. But if those rate cuts come along with signs of an economic recession, that could lead the price of high yield bonds to decline as default risks rise. In bond trader terms, this would mean that the spreads between risky and safe debt get wider. High yield investors say the sector is still on solid ground, at least for now. Michael Schlembach, managing director and senior portfolio manager for Marathon Asset Management, compared high yield borrowers to U.S. consumers who had long-term debt, like mortgages, that were locked in at low rates from before the Fed’s rate hike cycle and are just now starting to borrow again. “You have this mix of increasing coupon income and the legacy benefit of lower interest rates that have benefitted the corporate fundamentals over the last couple of years,” Schlembach said. Marathon is a partner with John Hancock on the JHHY fund, which launched in May. Interest in high yield funds has been tepid this year but has picked up a bit in recent weeks. Four of the five biggest broad-based high yield bond ETFs have seen inflows over the past month, according to FactSet. The net total of those inflows adds up to about $1.3 billion. “There is episodic interest in high yield. Overall, though, I would say investors are relatively skittish given close to historically tight credit spreads,” said AJ Rivers, head of U.S. retail fixed income business development at AllianceBernstein. This environment could be a chance for actively managed ETFs to prove themselves. Fixed income in particular has been a growth area for active, with one pitch being that professional managers can help navigate rapidly changing default risks and liquidity issues that could come from tracking an index. “Our philosophy is really you can win by not losing,” Rivers said. Schlembach said active management can make a difference as companies begin to refinance their debt, as higher quality borrowers have been more willing to do in recent months. “The ability to capture that nuance with respect to credit quality is important when the market is open but the refinancing activity only makes economic sense for a certain subset of borrowers,” Schlembach said. “It’s a majority of the market, but we’re seeing increasing dispersion with respect to the tail — the 5% of borrowers that won’t make it through,” he added.
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