Oil Burden Makes Life Miserable In Junk ETF As Stocks Plod Along
By Inyoung Hwang and Carolina Millan
The exposure gained from exchange-traded
funds is getting painful for junk-bond investors — more than
ever, when compared with stocks.
The iShares iBoxx $ High Yield Corporate Bond ETF has lost
3.7 percent in the last three months. It?s down 2.5 percent this
year, its worst underperformance on record compared with the
SPDR S&P 500 ETF Trust, which has gained 2.2 percent.
The reason for the gap is largely the makeup of the two
indexes, with energy companies accounting for twice as much of
the high-yield pool. Declining commodity prices and the prospect
of higher interest rates are making junk bonds look more
perilous, as concerns grow that the industry?s riskiest
borrowers won?t be able to service their debt.
?We?re certainly having conversations about what the
ramifications for energy and mining stocks are,? said Alex
Altmann, equity-trading strategist at Citigroup Inc. in London.
?Does it affect equities? Currently, no.?
With a weighting of 6.9 percent, the influence of energy
companies on the Standard & Poor?s 500 Index is at its smallest
in more than a decade. By comparison, oil and gas producers and
the industry?s makers of services and equipment account for
about 14 percent of high-yield bonds, according to data compiled
by Bloomberg and UBS Group AG.
Record Borrowings
The rout in oil prices has caused investors to suspect
high-yield energy companies may struggle to service the record
$120 billion they borrowed in the past three years to finance
production during the shale boom.
?These guys are the ones bearing the brunt of lower world
prices,? said Jack McIntyre, a portfolio manager at Brandywine
Global Investment Management in Philadelphia. ?These guys are
more levered, with worse balance sheets. They?re going to feel
the pressure of lower energy prices more.?
While the plunge in commodities also caused drops in U.S.
stocks, the S&P 500 is still hovering within 1.5 percent of a
record high. Its companies will manage to increase profit this
year despite a decline in earnings at energy producers, analysts
estimate.
The high proportion of commodity companies in the high-
yield market represents ?a large amount to move the needle and
cause the rest of the industry to feel it,? said Jody Lurie, a
corporate-credit analyst at Janney Montgomery Scott LLC in
Philadelphia.