High-yield bond ETF exodus gathers pace as 10% drains from funds

INVESTORS have pulled more money out of US junk-bond funds than from any other asset class so far this year, according to a report by Bank of America. 

As a result, high-yield exchange-traded funds have lost nearly 10 per cent of their total assets under management, year-to-date. And funds that track leveraged loans shed 7 per cent. The losses underscore the anxiety percolating in markets as investors await a recession and try to anticipate how severe it will be if one occurs at all. 

While the fund-flow data appears bleak, returns tell a different story. Across US fixed income, the best-performing asset classes this year are the riskiest: CCC high-yield bonds and leveraged loans. 

The lowest-quality junk bonds have already delivered investors double-digit returns so far in 2023 while spreads are tighter than at the beginning of the year. Leveraged loans, meanwhile, have returned more than 7 per cent year-to-date and are on track for 10 per cent returns if loan prices hold up, one fund manager says.

Investors, meanwhile, continue to throw money at high-quality debt with funds adding 2 per cent to assets under management, according to Bank of America, a sign that they would rather park cash in very safe areas that offer decent returns rather than chase double-digit returns on riskier debt that could run into trouble as the economy slows. 

Recently, bets on a hawkish Federal Reserve drained money from junk-bond ETFs with more than US$1 billion exiting the US$13.1 billion iShares iBoxx High Yield Corporate Bond ETF (HYG). BLOOMBERG