ETF NEWS - ULTUMUS

Specifically junk

Written by Bernie Thurston | 26 May 2022
Specifically rated junk bond ETFs
BondBloxx, the ETF newcomer specialising in bond ETFs, is launching more bond ETFs. Its previous listings focussed on sectors. But today's listings are based on credit ratings.
 
  • BondBloxx BB Rated USD High Yield Corporate Bond ETF (XBB)
  • BondBloxx B Rated USD High Yield Corporate Bond ETF (XB)
  • BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC)

The three funds hold junk bonds based on their credit ratings. All three track ICE high yield indexes and use ratings from the big three ratings shops Moody's, S&P, Fitch.
 
Bonds rated BB are just below investment grade. Bonds rated B are very much in junk territory. And bonds rated CCC are very risky indeed.
 
The funds, in order, charge 0.20%, 0.30% and 0.40%.
 
Bernie's analysis - very smart
We slice and dice bond ETFs based on call kinds of things: currency, geography, duration, maturity, etc.  Yet there have been very few efforts to slice them based on specific credit ratings. Investors, and ETF issuers, seem to be happy to go with the broad strokes like "investment grade" "high yield" "fallen angel". To my knowledge, the only effort made has been the iShares BB Rated Corporate Bond ETF (HYBB), which has $160 million in assets. And I think BlackRock brought that out at a client request. So BondBloxx is trying something genuinely new.
 
What's more, there will be real demand for these. Providing more targeted exposure to credit ratings allows investors to manage risk better. And this is especially useful in times like now, where rising interest rates make junk bonds less appealing and put pressure on less creditworthy companies. It also allows investors to more precisely inspect yields, and make clearer risk-return trade-offs.
 
The only downside I can really see is that you have to trust the credit ratings agencies. I still scratch my head at how the ratings agencies made out like Ronnie Briggs after the 2008 financial crisis. There's been no real reform on the ratings system since then -- the same old conflicts of interest are still there. (Pay for ratings, incentives for volumes, etc.) And I also find it a bit funny how we, the investment community, just stopped talking about it.
 
Nonetheless, great products. I like these a lot.