HYBB Vs. HYG: Comparing Two IShares High Yield ETFs

(This article was co-produced with Hoya Capital Real Estate)

Introduction

Investors like high-yield, or junk bonds for the income they generate, hopefully understanding they come with more risk of default. These bonds will be rated BB or lower by Standard & Poor's and Ba or lower by Moody's. Using the S&P ratings, the next chart gives readers an idea of the risk for each rating level.

Until you get down to CCC, bond default rates are low, though there is a jump when entering "junk" status.

The next chart shows defaults by rating and how the rate changes as the bonds age.

This article reviews and compares two similar High-Yield ETFs from iShares:

• iShares BB Rated Corporate Bond ETF (NYSEARCA:HYBB)
• iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG)

With similar results over HYBB's short life, my preference is HYBB for its much lower expense ratio. Investor in HYG might consider tax-loss swap. I give both a Hold rating at this time.

iShares BB Rated Corporate Bond ETF review

Seeking Alpha describes this ETF as:

The fund invests in fixed-rate, US dollar denominated, corporate bonds issued by industrials, utility and financial companies and with maturity to more than one year. It invests in high yield securities that are rated as between BB+ and BB- by S&P and Fitch and Ba1 and Ba3 by Moody's. The fund seeks to replicate the performance of the ICE BofAML BB US High Yield Constrained Index. HYBB just started in October, 2020.

Source: seekingalpha.com HYBB

HYBB has $239m in AUM and costs investors 25bps in fees. The TTM Yield is 5.9%.

Index review

ICE defines this index as:

ICE BofA US Corporate BB Index, a subset of the ICE BofA US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a given investment grade rating BB.

Source: indices.theice.com

They provided some tables with basic data included, of which I picked this one to show. As the name implies, all the bonds are rate BB.

HYBB holdings review

iShares provides some basic portfolio characteristics.

While the Top 3 sectors comprise 45% of the exposure, there is a nice spread across the other sectors. In this time, the small allocation to banks is a plus.

I suspect the non-BB-rated bonds were such when issued, some are now better, some worse.

Over 50% of the holdings mature with the 3-7 year window, with the portfolio's WAM at 5.82 years.

Before 2025, 3.55% of the portfolio matures. These bonds carry a WAC of 5.16%.

Top 20 holdings

With over 900 holdings, these bonds are only 7.4% of the portfolio. The bottom half come to a respectful 30% of the portfolio's weight. All bonds are dominated in the USD, so there is no currency risk.

HYBB distribution review

While recent payouts are up, the change is not consistent. Even with its limited history, Seeking Alpha gives this a "B" grade.

iShares iBoxx $ High Yield Corporate Bond ETF review

Seeking Alpha describes this ETF as:

The fund invests in fixed income markets of global developed region. It invests in U.S. dollar-denominated high yield corporate bonds with a maturity of at least one year and less than 15 years and a sub-investment grade rating from Fitch, Moody's or S&P. The fund seeks to track the performance of the Markit iBoxx USD Liquid High Yield Index. HYG started in 2007.

Source: seekingalpha.com HYG

HYG has $15.2b in AUM and comes with a much higher fee: 48bps. The TTM Yield is 5.5%.

Index review

The index manager provides this description of their index.

The Markit iBoxx USD Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the USD high yield corporate bond universe. The indices are an integral part of the global Markit iBoxx index families, which provide the marketplace with accurate and objective indices by which to assess the performance of bond markets and investments. The index is market-value weighted with an issuer cap of 3%.

Source: cdn.ihsmarkit.com

For more details on the index rules, readers can use this link.

HYG holdings review

Here, iShares provides this data points.

Most of these characteristics are higher for HYG than HYBB.

While the top sectors parallels HYBB, HYG has over 50% in the top 3 sectors, and five with weights over 10%. Without the BB-rated mandate, HYG has a large allocation below that one.

This helps account for HYG having a higher yield and portfolio WAC. HYG shows a similar maturity schedule as does HYBB, with over 63% in the 3-7 year window.

For HYG, 3.1% of the portfolio matures before 2025, with a WAC of 5.63%.

Top 20 holdings

Even with 1200 holdings, these holdings are over 7% of the portfolio. For HYG, the bottom half account for 71% of the portfolio; leveling the effect of each bond's impact to the ETF.

HYG distribution review

As expected, payouts move, with a delay, along with the change in interest rates, though not perfectly as recent payouts are actually down from 2022. HYG scores only a "C-" from Seeking Alpha on this ETF factor.

Comparing ETFs

Using various sites, I collected these fixed income data points on each ETF.

The big difference is HYG's holds a much higher level in b-rated bonds than HYBB, which focuses on BB-rated bonds. With a longer duration, HYG should do better once interest rates start falling.

None of the data provided by PortfolioVisualizer favors one ETF over the other. That goes for income provided to investors also, with each ETF providing the most in an equal number of years.

Portfolio strategy

I didn't not find YCharts providing similar data for "junk bonds" but would expect the basic movements to be similar. BBB-rated bonds did best when both their rate and risk premium were dropping. While down from their recent peak, neither is near recent lows.

This recent WSJ article listed four reason High Yield bonds might be worth buying.

• Historical returns: Going back to 1987, the Bank of America US High Yield Index, which tracks a basket of junk bonds, has never suffered two consecutive years of negative returns. That includes the years of the global financial crisis of 2007 to 2009.
• Healthier borrowers: The companies issuing high-yield debt these days are in better shape financially than they have been in the past, according to analysts. That is partly because many wobbly borrowers have migrated away from issuing junk bonds to borrowing in the loan market.
• Underrated bonds: Many of the remaining borrowers in the junk-bond market are larger companies with robust balance sheets and decent financials. Yet their bonds continue to be labeled as being at a higher risk of default. That’s because credit-rating firms have become much more cautious about raising their ratings, due to some classification mistakes made in the past.
• Economy's direction: Many analysts believe the economy will slow or enter a mild recession later this year. If or when the economy slumps, two things will happen to change the price of bonds. First, yields on 5-year Treasuries will start falling and may hit 2% by mid-2024, down from 3.4% recently. However, the benefit of falling government rates will be partially offset by increases in junk credit spreads of approximately half a percentage point by the end of the year.

While this article reviewed one new and one seasoned High Yield ETF, here are some others that should included in any due diligence analysis of this part of the bond market. The next tables includes the two reviewed here plus eight others.

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