JNK ETF Rating Report – What You Should Know Before Investing

Category: High Credit Risk
Style: Passive
LB Rating: ****  3 Stars
Last Updated: 9/13/12

Useful Links:

How to choose a bond fund with LB Ratings
High Yield Bond Funds Explained



JNK ETF Overview

Summary: The JNK ETF is not a bad choice for a passive high yield bond fund.  The primary difference between the JNK ETF and its main competitor the HYG, is that JNK seeks to invest only in the most liquid high yield bonds.

Commentary: The JNK ETF is a fine way to get exposure to the high yield bond market at a price which is less than almost all actively managed high yield funds.  The fund is currently paying out around 6.1% per year in income.  Like all high yield bond funds the state of the economy is going to have a large effect on the total return of the fund.  During the 2008 financial crisis the price of the JNK ETF dropped from $47 per share to as low as $26 per share.  After things began to stabilize, the price recovered, and has been relatively stable since.  With high yield funds, credit risk has a much larger effect on total return than interest rate risk.  You can read more about this here.


The JNK ETF Rating Criteria

Fees: Good The JNK ETF’s expense ratio of .40% is less than half of what you would pay for the average actively managed high yield fund.  It is also lower than its main competitor the HYG, which has a .50% annual expense ratio.  You can learn more about bond ETF fees here.

Tracking: Excellent The JNK ETF does a great job of tracking its index.  According to XTF.com it has a tracking error of only .38%.  However, the index it tracks is made up of very liquid high yield bonds only.  If you are looking for a broader exposure to the bond market it is still ok.  Around 97.7% of the ETF performance can be explained by the Bank of America Merrill Lynch High Yield Master Index II, which is more representative of the entire high yield bond market.

Liquidity: Good The JNK ETF, has over $12 billion dollars in assets. The size of the fund is large enough to ensure an that there is an active market for buying and selling shares.  However, just because there are lots of buyers and sellers does not mean that the ETF doesn’t sell at a premium or discount to its NAV.

As high yield bonds are hot right now, cthe price trades about 1% higher on average than its underlying NAV. This is a problem which is native to all high yield bond etfs, however JNK does a better job than most (including HYG) of handling this issue.  Learn why bond ETFs sometimes do not track their NAV here.

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