Junk bond ETF investors rush for the exits

Thu Nov 15, 2012 5:41pm EST

* Investors may be giving up more than they realize

* Junk bond ETFs lose $836 million over past month

By Jessica Toonkel

NEW YORK, Nov 15 (Reuters) - Investors are fleeing junk bond exchange traded funds in droves this month, fearing the risk of investing in these funds is not worth the reward, but the rush is exposing an ETF weakness that's reducing bottom-line returns.

Unlike ordinary mutual funds, which are priced once a day at about the exact value of their assets, ETFs trade in real time and that means prices can get out of line with true worth of their assets.

The rush of junk investors out of ETFs, almost $1 billion pulled in the last four weeks, is the biggest since June, when fears about the Greek debt crisis were at a peak. That has pushed fund prices to a discount -- investors selling now are only get 97 or 98 cents for every dollar of assets. Making the problem worse, many bought in at the end of 2011, when a crowd of buyers pushed ETF prices to premiums.

For example, investors who bought BlackRock Inc's $16.27 billion iShares iBoxx High Yield Corporate Bond ETF on Dec. 27 2011, when investors were rushing into high-yield bond ETFs, bought at the highest premium - 2.63 percent of fair value - according to an analysis conducted for Reuters by IndexUniverse LLC.

If those investors sold the ETF on Nov. 13, they would have seen investment return gains of 8.15 percent. If the ETF has been bought and sold at fair value, that figure would have been 11.21 percent.

"So you threw away 3.07 percent of your performance by buying in when there was peak demand and selling during peak panic," said Dave Nadig, director of research at IndexUniverse. "ETF investors getting out of junk bonds are getting hit harder than those who are just getting out of junk bond mutual funds.

Over the past four weeks ending Nov. 14, investors pulled $836 million out of high-yield exchange-traded funds, the biggest outflows since June, according to Lipper, a division of Thomson Reuters.

In the past week alone, the two biggest high-yield ETFs, the iShares iBoxx High Yield Corporate Bond and the State Street Global Advisors' $11.76 billion SPDR Barclays Capital High Yield Bond ETF lost $394 million and $315 million respectively, the biggest losses for the two firms since June, according to Lipper.

"People are less comfortable with the amount of risk they have and are scaling back," said Todd Rosenbluth, an S&P Capital IQ analyst.

But ETF investors who think they are saving themselves future pain by getting out of high-yield ETFs now may have no clue how much they have lost by selling when everyone else is doing the same, analysts said.

"It's a classic buyer beware situation," Nadig said.