HYG ETF: Rating Report for the iShares High Yield Bond Fund


Category: High Credit Risk Funds
Style: Passive
LB Rating: **** 4 Stars
Last Updated: 9/13/12

Useful Links:

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



iShares High Yield Bond Fund HYG Overview

Summary: The HYG ETF is a solid choice for a passive high yield bond fund.

Commentary: The HYG 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 funds.  The fund is currently paying out around 5.76% 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 ETF dropped from $104.50 per share to as low as $62 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.


HYG ETF Rating Criteria

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

Tracking: Good HYG does a great job of tracking its index, the iboxx $ Liquid High Yield Bond Index.  According to XTF.com it has a tracking error of only .42%.  However, the index it tracks is made up only of liquid high yield bonds.  If you are looking for a broader exposure to the bond market it is still ok.  Over the last 3 years Around 96.73% 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: OK The HYG ETF, has over $12 billion in assets. The size of the fund is large enough to ensure there is an active market for buying and selling shares.  However, just because there are lots of buyers and sellers, does not mean the ETF doesn’t sell at a premium or discount to its NAV.

As high yield bonds are hot right now, currently the price trades on average about 1.3% higher than its underlying NAV. This is a problem which is native to all high yield bond etfs, however HYG seems to have a little more trouble managing this than its main competitor the JNK.  Learn why bond ETFs sometimes do not track their NAV here.



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