Bond investing in the U.S. was down last year on a global sell-off thanks to the Fed’s taper concerns and the resultant rise in long-term interest rates. The trend should remain the same this year too, as the Fed finally started on its QE pullback process. In such a backdrop, yield-hungry investors focused on junk bonds have turned their focus to the international market.
In most developed international markets, interest rates remained extremely low thus posing no threat to bond prices. Also, the economic picture is steadily improving in Europe and Japan, thus reducing the risk of corporate defaults.
Notably, Europe’s high-yield corporate bond market saw a thriving 2013 hitting a record high of $141.2 billion in high-yield volume. Seeing this trend, State Street Global Advisors – the second largest ETF Issuer – put forward a high-yield bond ETF in the international space. This newcomer– SPDR Barclays International High Yield Bond ETF – hit the market on March 13 and trades with the ticker symbol ‘IJNK’.
Notably, the issuer had earlier witnessed success in the U.S. junk bond space with its product SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK).
IJNK in Focus
The new passively managed ETF looks to track the Barclays Global ex-US Issuers High Yield Corporate Bond Index which seeks to resemble the high yield fixed corporate bonds outside the US with maturity of more than a year. The securities included in the index should have a minimum market value of $350 million (₤210 million).
As of February 28, the index includes a total of 718 securities from 46 countries. The security-specific concentration risk is very low in the index with no security accounting for more than 0.45%. Corporate sector wise, industrials takes up the major share of the index with more than three-fourth weight of the basket while financials and utilities occupy respectively around 20% and 5% of the portfolio.
These component bonds are all junk bonds which have an average rating of Ba1/BB+/BB+ out of the three major credit rating agencies. IJNK opts out floating rate notes, linked bonds, convertible bonds, warrants and other structured offerings. The ETF charges investors a reasonable expense ratio of 0.40% (see all the junk bond ETFs here).
Index offers an average yield to worst of 5.10%. The product has effective average maturity of about 5.37 years and proposes weighted average coupon of 6.71%. Investors should also note that the products carry default risks since these do not possess very high credit ratings.