High yield ETFs have attracted strong inflows this year amid the lure of extra yields and the supportive market environment, however, some fund selectors are unconvinced.
According to data from Bloomberg Intelligence, high yield UCITS ETFs have seen $1.9bn inflows so far in 2024, as at the end of February, driven by the attractive yields on offer, especially in euro-denominated corporates.
Furthermore, forecasts of rate cuts from the Federal Reserve in response to falling inflation has created an attractive environment for risk assets such as high yield.
“We see markets embracing a more supportive near-term macro outlook,” Wei Li, global chief investment strategist at the BlackRock Investment Institute, said. “Robust US growth, nearing Fed rate cuts and falling inflation have lessened the market’s recession worries.
“We favour high yield. We see broader credit spreads staying tight for now given the supportive risk-taking backdrop, and strong demand for new issuance of US investment grade and US high yield corporate bonds.”
Refinancing risks
The big concern in high yield is rising default rates. Many companies face the prospect of refinancing by 2025, a potential risk given the higher interest-rate environment.
According to data from BlackRock, approximately 10% and 6% of the market value of euro and US-denominated high yield is maturing in 2025, respectively.
“We find that is not an exorbitant amount, and even the lowest-rated high yield issuers have been able to refinance debt this year,” Li added.
However, fund selectors have highlighted the impact that higher interest rates will have on companies looking to refinance in the next two years.
Nathan Sweeney, CIO of multi-asset at Marlborough, has recently reduced the firm’s exposure to high yield due to the refinancing risks attached to the asset class.
Furthermore, from a portfolio management perspective, he added there are opportunities to take further risk by being overweight equities while using the fixed income portion of portfolios to be more defensive.
“While the economic environment is solid and interest rates are coming down, the cost of refinancing for companies will be far higher,” Sweeney told ETF Stream.
Echoing his views, Antoine Denis, head of advisory at Syz Group, said spreads are currently too tight for high yield to be attractive.
“You are not compensated for the risk you are taking,” he stressed.
Final word
Overall, the market environment is currently attractive, however, there are other ways fund selectors can add additional risk to portfolios without looking at high yield, an area which could struggle as bonds start to mature.
