Corporate Bond ETFs. iShares iBoxx $ High Yield Corporate Bond ETF with 15,4% upside potential and 5% dividend yield

  • Entry Price BUY - 75.7
  • Target price - 86.00
  • Position size - 2%
  • Risk - Average
  • Horizon - 12 months
  • Potential - 13.64%

What's the idea?

As we said previously, an acceleration in the rate of inflation reduction could start as early as the first half of 2023. The realisation of this forecast would push the US Federal Reserve to ease monetary policy, which would ultimately have a positive effect on stock and debt markets. In order not to miss the start of the rate cuts and to participate in the bond rally, we suggest gradually gaining positions in funds that specialise in corporate bonds and can show good yields during the market recovery.

About Company

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG.US) invests in US dollar-denominated high-yield corporate bonds. Such bonds differ from similar investment-grade in that they offer higher yields but also have a higher risk of default, i.e., losing an investment in the . Nevertheless, an advantage of this ETF is its high level of diversification, whereby the default of an individual counterparty will not significantly affect the overall result of the fund.

Why do we like iShares iBoxx $ High Yield Corporate Bond ETF?

The iShares iBoxx $ High Yield ETF invests in high-yield corporate bonds of a non-investment grade, so it has higher risk and volatility, but these drawbacks are offset by higher returns. It is worth noting that this ETF reduces the impact of individual issuer default risk through significant diversification.

A brief description of how bonds work

Bondholders not only earn a fixed yield on coupon payments, but also have the opportunity to boost their capital if the bond’s market value increases. A bond’s market price and the interest rate are inversely related. In other words, an increase in the interest rate will reduce the market value of a bond and vice versa. An important parameter in this relationship is duration (weighted average payment flow term), which reflects the extent to which interest rate changes affect a bond's value. Prices of bonds with low duration react weakly to interest rate changes, while prices of bonds with a long maturity and correspondingly high duration show high volatility in response to rate fluctuations. Roughly speaking, duration reflects a bond's degree of risk in terms of maturity length.

Key ETF metrics:

  • Assets under management: $18.32 billion
  • size: 1x
  • Number of stock names in the ETF: 1224
  • Effective duration: 3.97 years
  • Weighted average maturity: 5.3 years
  • Average yield to maturity: 8.06%
  • Expenditure ratio: 0.48%
  • dividend yield: 5.07%
  • YTD yield: -10.93%
  • Yield since January 2010: 7430%
  • Average annual growth, adjusted for inflation, since 2010: 184%

Issuers with the highest allocation to ETFs:

  • CCO HOLDINGS LLC — 2.37%
  • FORD MOTOR CREDIT COMPANY LLC — 2.09%
  • TENET HEALTHCARE CORPORATION — 1.46%
  • CSC HOLDINGS LLC — 1.28%
  • TRANSDIGM INC — 1.24%

Distribution by sector/industry:

  • Consumer, cyclical — 19.99%
  • Communications — 18.18%
  • Consumer, non-cyclical — 13.10%
  • Energy — 11.69%
  • Manufactured goods — 9.28%

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