TEXT-S&P: high-yield ETFs, a growing slice of speculative-grade market
Nov 7 - As investors continue their quest for yield amidst low interest rates, high-yield exchange-traded funds (ETFs) have been playing an increasingly important role in the market for speculative-grade bonds (those rated 'BB+' and lower), said an article published today by Standard & Poor's Global Fixed Income Research, titled "High-Yield ETFs Represent A Narrow But Growing Slice Of The U.S. Speculative-Grade Market." "The demand for fixed-income ETFs has been brisk in recent years," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research. "High-yield ETFs attracted $1.6 billion of net new money in September 2012, according to data from Lipper." This net inflow was roughly equivalent to 4.5% of new speculative-grade bond issuance during the month. Although there has been a net withdrawal of investor funds from high-yield ETFs over the past few weeks, investments in high-yield ETFs increased by a net $9.1 billion this year through mid-October. "However, the ease with which investors can enter and exit ETF investments creates new and risky dynamics in the speculative-grade market with the potential flow of 'hot money,'" said Ms. Vazza. Speculative-grade companies have a higher default risk than investment-grade companies. Therefore, when the credit cycle turns against investors, losses from defaults can quickly outstrip the additional interest payments that high-yield investors receive. Since we are entering the stage of declining credit quality in the current credit cycle, the credit quality of an issuer or a portfolio has become paramount. Managers of high-yield ETFs aim to get returns that correspond to various high-yield indices, and, as a result, they invest in a narrower slice of the speculative-grade market than we analyze in our Global Fixed Income Research publications. Standard & Poor's Ratings Services rates 1,548 speculative-grade companies in the U.S., while the two largest high-yield ETFs hold bonds from fewer than 300 issuers each. Since high-yield ETFs are growing in importance to the speculative-grade market, we believe it is important that investors understand the differences between the funds' holdings and the total market of speculative-grade companies that Standard & Poor's rates. The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to firstname.lastname@example.org. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com.