iShares iBoxx $ High Yield Corporate Bond ETF

HYG

Market cap $18.1B

Corporate bonds that are below investment grade status may be less likely to default now. But investors still need to be careful.

The current economic environment is marked by persistent inflation and a weakening labor market, raising uncertainty and risk for investors. Despite these risks, large-cap equities, tech stocks, and high-yield credit continue to climb, defying expectations of repricing. Income-focused assets like real estate, financials, dividend growth (SCHD), and quality CEFs (UTG, PDI) now offer lower yields as well.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is doing relatively well this year, and is hovering at its all-time high as demand among investors jumped. HYG stock was trading at $81.23, up by 10% above the lowest level this year.

iShares Preferred and Income Securities ETF (PFF) is favored over iShares High Yield Corporate Bond ETF (HYG) as the Fed has entered an easing cycle. PFF offers higher yield, better credit quality, and lower fees than HYG, with recent outperformance driven by expectations of falling rates and economic uncertainty. PFF's sector concentration in financials and lower diversification present risks, but Fed stress tests show banks are well-capitalized for downturns.

Pessimistic market sentiment often creates generational buying opportunities. Legendary investors like Warren Buffett have made fortunes by being greedy when others are fearful. Unfortunately, while the data points provide a ground for being fearful, the market is still greedy. We could make a case for experiencing 'the everything bubble'.

Sovereign risks are evident and corporate earnings have impressed. However, these are known factors – it's time to look ahead. We remain bearish high yield credit, with the spread between high yield-to-investment grade narrowing toward the -1 sigma boundary. Fundamentals in high yield credit have probably struck an inflection point. Investment grade fundamentals seem better-off. However, credit spreads are exceptionally narrow.

The iShares iBoxx High Yield Corporate Bond ETF offers strong diversification, low equity correlation, and a 2.89-year duration, limiting interest rate sensitivity. Spreads are currently compressed, with no signs of excessive risk-taking or clear asymmetric recovery opportunities in the credit market. Liquidity and high-yield spreads historically signal stress; current indicators do not suggest an imminent buying opportunity for HYG.

The U.S. junk bond market is sending an optimistic message about the economy, despite market volatility around tariffs.

JPMorgan, already the largest manager of actively managed fixed income ETFs, expanded its capabilities with a splash today. The JPMorgan Active High Yield ETF (JPHY) began trading today with the aid of a large external institutional client and $2 billion.

The current environment is uniquely challenging, with uncertainty persisting and no clear catalyst for a recovery. Growth is richly priced, and, in my view, an unattractive space. This makes value and income investor areas relatively more interesting.