The U.S. high yield bond ETF category has a new asset leader. The iShares Broad USD High Yield Corporate Bond ETF (USHY ) is now the largest high yield bond ETF in the market, with assets totaling $15.9 billion as of Aug.15.
USHY has now surpassed its veteran counterpart, the iShares iBoxx USD High Yield Corporate Bond ETF (HYG ) in total assets. And it currently has roughly twice the asset base of the SPDR Bloomberg High Yield Bond ETF (JNK ) another — another trader darling.
Since July 1, USHY has taken in more than $2.6 billion in net creations. That brings its YTD total haul to $3.7 billion. By comparison, HYG has bled roughly that same amount year to date. It lost some $1.8 billion in net redemptions in the same July-to-date period alone.
USHY’s rise to the top of the asset-gathering race isn’t about near-term standout performance relative to its peers. A look at how USHY and HYG have stacked up relatively to each other shows a return path that’s been nearly identical over time. What’s more, compared to the broader category, USHY isn’t the top-performing high yield bond fund this year. That list includes strategies from Simplify such as the Simplify High Yield plus Credit Hedge ETF (CDX ). It also includes sector-focused funds from BondBloxx including the BondBloxx USD High Yield Bond Healthcare Sector ETF (XHYH ), among others.
Macro Doubts Meet Long-Term Opportunity
So far, 2024 has hardly been a year for performance=chasing in high yield bonds. On the contrary, concerns about economic conditions, volatility, and tight spreads relative to Treasuries have all been overhanging the segment. Those concerns have been feeding a narrative about too much potential risk for not enough potential reward associated with these bonds.
That said, yields have been high, and the latest earnings season has fostered some confidence in overall corporate financial health. Those two factors have offered some support to this space this summer. And they’ve fueled some demand as investors look to position ahead of expected interest rate cuts this fall.
According to FactSet, as of Aug. 9 with 91% of S&P 500 companies having reported Q2 results, 78% of companies surprised to the upside on earnings per share (EPS). “For Q2 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 10.8%. If 10.8% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4%),” the FactSet report said.
USHY is shelling out 30-day SEC yields of 7.5% in a portfolio of more than 1,800 bonds with effective duration of under 3.2 years. That demonstrates the portfolio’s sensitivity to interest rate moves. But USHY’s standout trait relative to HYG is its price tag. It costs 8 bps versus HYG’s 49 bps. That’s $8 per $10,000 invested versus $49 for the same dollar investment.
With that backdrop, it’s not surprising to see USHY rise to the top of investor demand as a low-cost broad portfolio of high yield bonds that’s delivering strong yields and diversification. In fact, USHY is among the lowest cost high yield bond ETFs in the market today — the fourth cheapest. And it’s not alone in its low cost appeal. Its counterparts, including the SPDR Portfolio High Yield Bond ETF (SPHY ), the Schwab High Yield Bond ETF (SCYB ), and the Xtrackers USD High Yield Corporate Bond ETF (HYLB ) have all picked up assets YTD as well. Each fund carries and expense ratio of 5 bps or less.
Liquidity Differences Matter to Different Use Types
USHY is not, however, as liquid as HYG. HYG is a liquidity machine. It trades on average more than 42 million shares a day at pennywide spreads, according to iShares data. USHY, meanwhile, trades only about one-fourth of that volume any given day — about 11 million shares on average a day — at an average spread of 0.03%. The fund’s is neither as liquid nor as efficient in trading terms as HYG.
That liquidity profile makes HYG a trader favorite. USHY’s appeal is geared more toward cost-aware investors looking for low cost ETFs as building blocks in a long-term diversified portfolio.
ETFs Delivering Value
USHY’s asset-gathering success reminds us that similar ETFs may serve different application goals. Here, two high yield bonds ETFs by the same provider navigating a similar universe of securities solve for different application purposes. USHY is about 10 years younger. It offers me-too exposure to that of HYG, but ielivers a different value proposition. The fund’s success is a testament to the versatility of the ETF wrapper and its ability to meet investors where they are with solutions that best meet their investment goals.
USHY is today the market’s largest U.S. high yield bond ETF. And it’s the 27th largest bond fund overall in a fixed income asset class led by the likes of the iShares Core U.S. Aggregate Bond ETF (AGG ), with $115 billion in total assets, and the Vanguard Total Bond Market ETF (BND ) with $113 billion.
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