Following an index change, SPDR now offers an ETF for ESG-aware investors seeking exposure to US high yield corporate bonds. This ETF can act as a core building block for investors looking to exclude certain types of controversy and to maximise the ESG score of the universe via positive screening.
Time to consider US high yield bonds?
Despite a bit of volatility during the late summer period, US high yield retains several features that could continue to appeal to fixed income investors.
As the name suggests, yields are measurably above many other types of investment. The yield to worst on the Bloomberg US Corporate High Yield Bond Index is more than 4% against around 1.2% for a Treasury index and 2.2% for a US investment grade (IG) exposure. While high yield is considered a risk-on exposure, the high yield and typically short duration means that yields have to rise more to offset the accrual effect on performance of the coupon than they do for Treasuries or IG exposures1.
As discussed in the latest Bond Compass, high yield performed well during the early stages of the 2014 taper of bond purchases by the Fed. Treasury yields declined and high yield spreads to Treasuries contracted. Crucially, looking ahead, the tapering process will only progress if growth holds up. Such a firm growth environment should create a favourable backdrop for high yield.
There is less scope for spreads to Treasuries to compress than there was in 2014 but equities remain buoyant on strong earnings and the upgrades versus downgrades ratio for Q4 remains well above 2 for both Moody’s and S&P.2
So the backdrop for high yield remains favourable, in our opinion, and the State Street Global Advisors fixed income client survey highlighted that investors are increasingly looking to integrate ESG exposure into their high yield portfolios. For this reason, as of 29 October 2021, the SPDR Bloomberg Barclays 0-5 Year U.S. High Yield UCITS ETF (ticker: SJNK) has changed its investment objective and been renamed SPDR Bloomberg SASB U.S. High Yield Corporate ESG UCITS ETF.
The ETF now seeks to track the performance of the fixed-rate, USD-denominated high yield corporate bond market, as represented by Bloomberg SASB US Corporate High Yield ESG Ex-Controversies Select Index. This index not only screens to exclude some of the more controversial issuers but also optimises bond allocations within the index to both maximise the ESG score and push its key characteristics toward the parent index (Bloomberg US Corporate High Yield Index). As such, it represents one of the only best-in-class ESG-screened high yield ETFs in the market.
To learn more about the ETF or the different indices tracking US high yield ESG indices, we invite you read our latest articles:
1Source: Bloomberg Finance L.P., as at 31 October 2021. The Bloomberg SASB US Corporate High Yield ESG Ex-Controversies Select Index has a yield to worst of 4.0% and a duration of 3.93 against the Bloomberg US Treasury Index which has a yield to worst of 1.14% and duration of 7.09 and the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index which has a yield to worst of 2.19% and duration of 8.80.
2Source: Bloomberg Finance L.P., as at 31 October 2021. The upgrades to downgrades ratios for North American high yield are 2.64 for S&P and 3.06 for Moody’s.
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