High Yield Bond ETFs and Their Underlying Indexes – HYG, JNK and ANGL

Very much related to the same needs of risk aversion and stable income, indexers create all kinds of high-yield bond indexes for the associated ETFs.

HYG, the iBoxx $ High Yield Corporate Bond ETF is the largest one of this kind, accumulating $17.6 billion since the launching in April 2007. It tracks Markit iBoxx $ Liquid High Yield Index.

Eligible bonds include fixed coupon bonds, step-up bonds with coupon schedules known at issuance (or as functions of the issuer’s rating), bonds with sinking funds, medium term notes (MTNs), Rule 144A offerings, callable and putable bonds, while preferred shares, convertible bonds, bonds with other equity features attached (e.g., options/warrants), perpetual bonds, floating rate notes, pay-in-kind bonds (during the pay-in-kind period), zero coupon bonds, zero step-ups (GAINS) and Reg S offerings are excluded.

Issuer domiciled are specified, Bonds from countries classified as developed markets based on the Markit Global Economic Development Classification are eligible for the index.

As to the issuer type, corporate debt only. Government debt, quasi-sovereign debt, and debt guaranteed or backed by governments are not eligible.

Minimum time to maturity 1.5 years to maturity for new bonds, 1 year for existing index constituents. Time to maturity at issuance is 15 years or less as of bonds issuance date.

Amount outstanding is at least $400 million.

All bonds need to have an average rating of a sub-investment grade. Ratings from Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating Services are considered. If more than one agency provides a rating, the average rating is attached to the bond.

As to the issuer size, $1 billion Issuer is capped at 3 percent.

The lockout period is 3 months and the minimum run is 6 months. It is rebalanced monthly in accordance with rules.

The second biggest ETF in this space is JNK, the SPDR Bloomberg Barclays High Yield Bond ETF, tracking Bloomberg Barclays High Yield Very Liquid Index. is a component of the US Corporate High Yield Index. JNK was issued in November 2007, so far reached an AuM of $11.08 billion.

The US High Yield Index uses the same eligibility criteria that include only the 3 largest bonds from each issuer that have a minimum amount outstanding of USD 500 million and less than five years from issue date. The index also limits the exposure of each issuer to 2% of the total market value and redistributes any excess market value index-wide on a pro rata basis.

Securities must be rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P and Fitch. When a rating from only two agencies is available, the lower is used; when only one agency rates a bond, that rating is used. In cases where explicit bond level ratings may not be available, other sources may be used to classify securities by credit quality.

At least one year until final maturity, regardless of optionality.  Bonds that convert from fixed to floating rate, including fixed-to-float perpetual, will exit the index one year prior to conversion to floating-rate. Fixed-rate perpetual are not included. Sub-indices based on maturity are inclusive of lower bounds. Intermediate maturity bonds include bonds with maturities of 1 to 9.999 years. Long maturity bands include maturities of 10 years or greater. Bonds must have been issued within the past five years. Seniority of Debt Senior and subordinated issues are included. Only taxable issues are eligible.

Dividend Received Deduction (DRD) and Qualified Dividend Income (QDI) eligible securities are excluded.

SEC-registered bonds, bonds exempt from registration at the time of issuance and SEC Rule 144A securities (with or without registration rights) are eligible.  A security with both SEC Regulation-S (Reg-S) and SEC 144A tranches are treated as one security for index purposes. The 144A tranche is used to prevent double-counting and represents the combined amount outstanding of the 144A and Reg-S tranches.

Bloomberg maintains two universes of securities: the Returns (Backward) and the Projected (Forward) Universes. The composition of the Returns Universe is rebalanced at each month-end and represents the fixed set of bonds on which index returns are calculated for the next month. The Projected Universe is a forward-looking projection that changes daily to reflect issues dropping out of and entering the index but is not used for return calculations. On the last business day of the month (the rebalancing date), the composition of the latest Projected Universe becomes the Returns Universe for the following month.

It’s also worth mentioning the VanEck Vectors Fallen Angel High Yield Bond ETF – ANGL, aiming to target “fallen angels”—bonds rated investment grade at issuance that has since been downgraded. It was issued relatively recent in April 2012 and has since amassed $ 826.99 million.

The rationale behind this investment is that a downgrade of credit, tends to create a downward pricing pressure, then future credit upgrade will compress credit spread, so the investors attain the price appreciation from this credit vibration.

Not surprisingly, ANGL’s security portfolio has a strong bias to BB-rated bonds, the highest credit rating for junk bonds. It was admonished to trade such kinds of bonds/ETFs with great caution due to thin trading volume and high spread.

Now comparing the performance of these entire three bond ETFs.

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