State Street Adds Short Term Junk Bond ETF

by on March 17, 2012 | Updated March 19, 2012 | ETFs Mentioned:

State Street has made another addition to its fixed income ETF lineup, recently rolling out the SPDR Barclays Capital Short Term HighYield Bond ETF (SJNK). The new fund will target junk bonds that have less than five years remaining to maturity, thereby delivering a unique combination of low interest rate risk with significant credit risk. The new ETF is linked to a Barclays index comprised of about 350 bonds rated below investment grade. According to the SJNK fact sheet, the underlying index has an average maturity of about 3.3 years and a weighted average coupon of about 8.4%. The yield to worst on the index is just under 7% [see Fixed Income ETF Center]. 

Bonds deliver yields to compensate investors for two sources of risk: interest rate risk and credit risk. The former is generally determined by the time until maturity; longer-term bonds are more sensitive to changes in interest rates, and therefore have more interest rate risk. The latter relates to the likelihood of a default by the issuer; high quality companies with strong cash flows are unlikely to default on obligations, while companies with less stable financials may be a higher credit risk [see High Yield ETFdb Portfolio]. So SJNK can be thought of as a way to generate material returns by maximizing one source of risk (credit) while minimizing another (interest rate). In that sense, SJNK is at the opposite end of the spectrum of ETFs such as TLT, which focus on long-term government debt [see Bond ETFs For Every Objective].

SJNK features an average time to maturity that is about half that of the broad-based JNK, a popular tool for achieving exposure to the junk bond market. The average coupons for the two portfolios are generally similar:

Average Maturity 6.81 years 3.32 years
Average Coupon 8.29% 8.38%

Junk Bond ETFs In Focus

SJNK will compete most closely with the PIMCO 0-5 Year U.S. High Yield Corporate Bond Index Fund (HYS); that ETF similarly focuses on high yield debt that has less than five years remaining until maturity. HYS, which launched in mid-2011, has already accumulated more than $200 million in assets under management. The PIMCO ETF charges an annual expense ratio of 0.55%; HYS will be quite a bit cheaper at 40 basis points [see All Junk Bond ETFs].

There are also a handful of BulletShares products from Guggenheim that focus on short-term junk bonds; BSJC holds junk bonds maturing in 2012, while BSJD focuses on debt maturing in 2013. Guggenheim also offers ETFs that target high yield bonds maturing in 2014 (BSJE) and 2015 (BSJF). Those products hold debt maturing in a certain year, and will ultimately convert to cash as the underlying securities mature. Most bond ETFs, including SJNK and HYS, operate indefinitely with the portfolio of securities evolving as old debt matures and new debt comes into the “maturity window.”

Disclosure: No positions at time of writing.