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New high-yield bond funds entering the market as interest rates begin to decline



In recent months, there has been a surge in new funds focusing on high yield debt in the ETF market. The latest addition to the race is the BlackRock High Yield ETF (BRHY), which debuted recently. Managed by the same team that oversees the BlackRock High Yield mutual fund, the ETF offers investors access to the same investment strategy but at a lower cost. With an expense ratio of 0.45%, the BRHY ETF is cheaper than the mutual fund, making it an attractive option for those looking to invest in high yield debt.

The launch of the BlackRock High Yield ETF is just one of several new high yield ETFs that have hit the market. Other recent additions include the John Hancock High Yield ETF, the Invesco BulletShares 2032 High Yield Corp. ETF, and the AB Short Duration High Yield ETF. These new products come at a time when the future of high yield debt is uncertain. With Treasury yields falling and the Federal Reserve expected to begin rate cuts, investors may be looking for funds that offer higher payouts. However, if rate cuts come alongside signs of an economic recession, the price of high yield bonds could decline as default risks increase.

Despite the potential risks, high yield investors remain optimistic about the sector’s outlook. Michael Schlembach, managing director at Marathon Asset Management, compared high yield borrowers to U.S. consumers with long-term debt locked in at low rates. He believes that the increasing coupon income and the legacy benefit of lower interest rates have supported corporate fundamentals in recent years. However, he also notes that actively managed ETFs may be better equipped to navigate changing default risks and liquidity issues that could arise in the high yield debt market.

Interest in high yield funds has been relatively low this year but has shown some signs of picking up in recent weeks. Four of the five biggest broad-based high yield bond ETFs have seen inflows totaling around $1.3 billion over the past month, according to FactSet. While investors may be skittish due to historically tight credit spreads, there is still episodic interest in high yield. This could be an opportunity for actively managed ETFs to demonstrate their value, particularly in a market environment where nuances in credit quality are becoming increasingly important.

Overall, the current environment presents both opportunities and challenges for high yield debt investors. With the launch of new high yield ETFs and interest in the sector starting to pick up, now may be a crucial time for investors to consider their options. Whether it’s through actively managed ETFs or traditional mutual funds, the key will be to stay alert to changing market conditions and to choose investments that align with individual risk tolerance and investment objectives. As the high yield debt market continues to evolve, investors will need to stay informed and be prepared to adapt their strategies accordingly to navigate the potential risks and opportunities that lie ahead.

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