ProShares Debuts Short Junk Bond ETF (SJB)

by on March 22, 2011 | ETFs Mentioned:

ProShares, the Maryland-based firm known for a suite of leveraged and inverse ETFs, has launched the first ETF offering daily inverse exposure to junk bonds. The ProShares Short High Yield (SJB) will seek to deliver daily results that correspond to -100% of the daily change in the iBoxx $ Liquid High Yield Index. That index serves as the underlying for the ultra-popular iShares iBoxx $ High Yield Corporate Bond Fund (HYG), which has more than $8 billion in assets and consists of more than 400 individual junk bonds.

ETFs have become a popular vehicle for investors seeking exposure to high yield bonds; there are now nine funds in the High Yield Bonds ETFdb Category with aggregate assets of about $16 billion. SJB (think “Short Junk Bonds”) will offer a way to bet against junk bonds, an investment strategy that has seen increased interest in the current environment.

Junk Bond Bubble?

High yield bonds–corporate debt with an S&P rating of less than BBB- or a Moody’s rating less than Baa3–has been on a stellar run over the last two years, delivering double digit gains in both 2009 and 2010 as investors sought to enhance current returns during a prolonged stretch of record low interest rates (which still continues today and is widely expected to continue for several months). That rally in junk bonds has sent yields near record lows, sparking concerns among some investors that aggressive buying of junk bonds is due to reverse [see [Beyond JNK: ETF Options For Yield Hungry Investors].

Recently, the 30-day SEC yield of HYG was just 6.26% while the average yield to maturity came in at about 6.8%. Those metrics are well above yields on comparable investment grade bond ETFs; AGG‘s 30-day SEC yield is about 2.5% while the same yield measure for LQD comes in at 4.2%. But every meaningful yield metric for junk bonds has declined markedly in recent months as the asset class has continued to draw interest from yield-hungry investors willing to take on additional risk to enhance the return to the fixed income portion of their portfolios. Yield metrics for junk bond ETFs were teasing 10% earlier this year, and credit spreads have narrowed considerably as yields have dropped off.

SJB presents an option for investors looking to bet against junk bonds, offering daily inverse exposure to a broad-based index of high yield debt. The daily reset feature of SBJ means that the fund won’t necessarily deliver returns equal to -100% of the related index over holding periods longer or shorter than a single session; both the change in the underlying index and the direction of the market will impact multi-session performance.

Inverse Bond ETFs Remain Popular

With interest rates expected to begin a climb higher eventually, many investors have become bearish on the outlook for bonds–and many have embraced ETFs as a tool to express that view. The ProShares UltraShort 20+ Year Treasury Bond (TBT), which offers -200% daily exposure, has more than $5.5. billion in assets. The Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV), which dials up exposure even further, has close to $500 million. Junk bonds aren’t impacted by rate changes to the same extent that Treasuries and investment grade corporate debt are, but the Fed’s moves certainly still can sway this asset class.

SJB joins the Short 20+ Year Treasury (TBF) in the ProShares lineup; there are a handful of funds in the Leveraged Bonds ETFdb Category offering amplified inverse exposure to fixed income benchmarks. The new fund will charge an expense ratio of 0.95%, consistent with other leveraged and inverse products.

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Disclosure: No positions at time of writing.