We have qualitatively reviewed this strategy and reaffirmed its Average People and Average Process ratings. JPMorgan BetaBuilders USD High Yield Corporate Bond ETF BBHY overhauled its strategy in early 2023. Its new passive approach brings some perks and comes with a lower fee. That said, indexing the high-yield bond market presents challenges that curb the fund’s appeal. The following text is from Jan. 30, 2023.
The ICE Bank of America U.S. High Yield Index, which this ETF will track, faces challenges that stem from the market it targets rather than flaws in its own construction. The index absorbs sub-investment-grade corporate bonds with at least $250 million in face value outstanding, weights them by market value, and rebalances monthly. Market value weighting works well in most markets. But high-yield bonds are illiquid, so their prices don’t always reflect all available information about their value. Active funds can exploit this mispricing for profit, forcing this price-taking benchmark to play catch up.
While more rigid than its active peers, the new benchmark mimics the dimensions of the high-yield bond Morningstar Category average. The portfolios share similar duration profiles and corporate bond sector exposure. The index shoulders more credit risk than average because it can’t reach into investment-grade territory, but it doesn’t look too much riskier than the average peer. Avoiding pronounced active bets along credit, sector, or duration lines increases the impact of the fund’s low fee, which should aid category-relative performance.
A broad reach should help this fund deliver above-average yield. Admitting thinly traded issuances to the index can require steeper trading costs, but many of these securities offer healthier yield in return.
Lower stakes in cash and investment-grade debt have made index performance more volatile than the category average. Higher risk has translated into higher reward: after adjusting for fees, this index outpaced the category norm by 1.33 percentage points over the 15 years through 2022.
This report was updated to clarify language around risk.