Investors shift into high-yield ETFs as a potential Fed pause looms
Investors Turn to High-Yield Bond ETFs as Fed Rate-Hiking Cycle Slows Down
As the Federal Reserve’s rate-hiking cycle comes to a close, investors are seeking higher yields. Data on exchange-traded fund (ETF) flows suggests that investors are showing interest in high-yield corporate bond ETFs. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) received nearly $1.2 billion in cash over the past week, making it the fifth top fund of the week by inflows and trailing only four broad equity funds. The seven biggest high-yield ETFs saw inflows, including the iShares Broad USD High Yield Corporate Bond ETF (USHY), which saw about $117 million in flows this past week.
According to the CME FedWatch Tool, traders expect the central bank to hold rates steady at next week’s Federal Reserve meeting. The market is split on which direction the Fed will go by its December meeting. If the Fed signals that it’s done hiking, market yields could fall as traders price in future cuts. This means some investors might want to buy now to lock in the higher yields.
Komson Silapachai, vice president of research and portfolio strategy at Sage Advisory in Austin, Texas, said, “High yield’s kind of in a sweet spot right now. It’s got a really attractive yield that you haven’t seen in almost two decades… I think investors are bullish. In terms of the equity market, you’re seeing a pretty strong rally this week.”
The spread between high yield and safer debt could widen in coming months if the labor market continues to weaken. However, the high-yield market appears to be of better quality than in previous economic cycles, Silapachai said.
Other notable ETF stats from the week include:
– The Amplify Online Retail ETF (IBUY) and the SPDR S&P Regional ETF (XRT) gained about 4% each through Thursday.
– The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) saw more than $900 million in outflows, making it the biggest investment-grade corporate debt fund with outflows.
– The Invesco S&P 500 Equal Weight ETF (RSP) was in the top five for inflows this week despite underperforming the S&P 500 dramatically year to date. This could be a sign that investors are betting the market rally will start to broaden out.
1. What are ETFs?
– Exchange-traded funds (ETFs) are baskets of securities that are traded on an exchange just like stocks.
2. What is the Federal Reserve rate-hiking cycle?
– The Federal Reserve rate-hiking cycle refers to the period of time during which the central bank raises short-term interest rates in order to prevent inflation.
3. What are high-yield corporate bond ETFs?
– High-yield corporate bond ETFs are ETFs that invest in bonds issued by companies with below-investment-grade credit ratings, which offer higher yields but with higher default risk.
4. Why are investors turning to high-yield bond ETFs?
– Investors are turning to high-yield bond ETFs as the Federal Reserve’s rate-hiking cycle begins to slow down and they seek higher yields.
5. What could happen if the Fed signals it’s done hiking?
– If the Fed signals that it’s done hiking, market yields could fall as traders price in future cuts, which means some investors might want to buy now to lock in the higher yields.
– Potential Fed pause prompts investors to flock to high-yield ETFs
– High-yield ETFs gain popularity among investors ahead of possible Fed pause
– Investors show preference for high-yield ETFs in anticipation of Fed pause
– High-yield ETFs attract more investors as Fed’s pause looms
– With Fed pause a possibility, investors turn to high-yield ETFs
Investors are seeking high-yield opportunities as the Federal Reserve’s rate hikes come to an end, as reflected in ETF flows data. FactSet reported that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) brought in nearly $1.2bn in cash over the past week, ranking as the fifth top fund for inflows, trailing only four broad equity funds. However, HYG was not alone, as the seven largest high-yield ETFs also saw inflows over the week. Ahead of next week’s Federal Reserve meeting, the interest in high-yield debt continues, with traders expecting the central bank to hold rates steady, though directions for the December meeting remain uncertain. Market yields may fall if the Fed signals it is done hiking, as traders price in future cuts, prompting some investors to buy now to lock in higher yields. Further, the recent rally for stocks, led by growth sectors, shows some risk appetite among investors. “High yield’s kind of in a sweet spot right now. It’s got a really attractive yield that you haven’t seen in almost two decades. … I think investors are bullish,” noted Komson Silapachai, vice president of research and portfolio strategy at Sage Advisory in Texas. Notably, the spread between high yield and safer debt may widen in the coming months if the labour market continues to weaken, though the high-yield market appears to be of better quality than in previous economic cycles.