Bond giant PIMCO expanded its ETF lineup to 14 products last Friday, rolling out its first ETF to offer exposure to high yield bonds. The PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS) will seek to replicate the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index. HYS joins nine other PIMCO ETFs that seek to replicate fixed income benchmarks; the company also offers four actively-managed bond funds.
With the launch of HYS there are now 10 ETFs in the High Yield Bonds ETFdb Category with aggregate assets in excess of $16 billion, including funds from Guggenheim, PowerShares, iShares, State Street, and AdvisorShares. That includes four Guggenheim ETFs that focus on junk bonds maturing in a certain year, ranging from 2012 (BSJC) to 2015 (BSJF).
Short Term Focus
The launch of HYS comes at a time when investors are increasingly concerned about the impact of interest rate hikes on fixed income valuations. iShares and Van Eck have recently debuted floating rate debt ETFs that hold investment grade corporate securities, while PowerShares has pioneered a senior loan fund focusing on lower quality floating rate debt. With key benchmark rates already hovering around zero and signs of inflation beginning to pop up, some suspect that the Fed will be forced to raise rates sooner rather than later, potentially hurting those invested in long duration securities and increasing the appeal of floating rate and short-term debt [Bond ETF Ideas: Room For Growth In Fixed Income Arena].
Other high yield bond ETFs, including the ultra-popular JNK and HYG, include debt across all maturities. HYS will focus on short term debt, holding only funds that mature in less than five years. While rate hikes don’t have as significant of an impact on junk bonds as Treasuries and higher quality debt, the lower effective duration may still be appealing to those concerned about climbing interest rates. HYS is essentially a tool for investors looking to generate yield through exposure to credit risk, but happy to stay away from interest rate risk. A fund like TLT is the opposite; that ETF holds long term Treasuries, and as such has very little credit risk but significant interest rate risk [Treasury ETFs: Filing In The Duration Spectrum].
Disclosure: No positions at time of writing.