With three-quarters of a billion dollars in assets under management, the SPDR Portfolio High Yield Bond ETF (NYSEARCA: SPHY) aims to reflect the performance of its benchmark, the ICE BofA US High Yield Index. Since the ETF, unlike the index, has spending, such an underperformance by the ETF is not unexpected.
With an expense ratio of 0.10%, the difference is not significant, and we can see that the ETF has done a bit better over some periods. It could also mean the luck of the draw since the fund does not hold ALL the securities included in the index. The ETF is also free to invest in securities which are not part of their benchmark index, but which have the same economic characteristics as the securities which are part of the index, cash and near cash and instruments of the money market. In either case, the difference in performance between the two is not significant enough to continue waxing ineloquently on it. Let’s go on.
As the name of the ETF suggests, the portfolio is made up of high-yield bonds, also known as lower-grade bonds or junk bonds. Within this universe, SPHY selects bonds with at least one year maturity at the time of inclusion in the portfolio, those with a fixed coupon and a minimum outstanding amount of $250 million. The most recent figures show that SPHY holds 1,968 stocks, of which around 70% are concentrated in five sectors, with consumer cyclical being the highest concentration.
With close to 2,000 holdings, the diversification at the stock level is more than adequate. Based on currently published figures, their largest holding represents 0.36% of the portfolio. SPHY also remains close to the upper echelon of the high yield world, with most of its holdings rated BB or B.
While SPHY holds securities with maturities ranging from less than one year to over 30 years, most of them are between 2 and 10 years.
While the holdings average coupon is 5.74%, with beat prices (note the average price of $86.10), the yield to maturity for incoming investors is well over 9%, providing a spread more than 500 basis points on the risk-free rate. .
The yield at worst is almost the same as the yield to maturity. No surprise there because with the current interest rate environment, no one is in a rush to call or redeem their existing bonds. One thing to note is the option-adjusted term of 4 years. This indicates the sensitivity of the portfolio to interest rates, i.e. how much the value of the portfolio is expected to change with a corresponding change in interest rates. Whereas not exactly linearwhat this basically tells us about the interest rate sensitivity of this portfolio is that for every 100 basis point increase in interest rates the value of the portfolio will fall by 400 basis points and vice versa poured.
The fund has gained nearly 9% on its holdings in the past 30 days (at the time of writing), and this is reflected in the published 30-day SEC yield.
The payout yield of 6.30% is indicative of the past 12 months and not what the extrapolation should be based on current earnings. We expect distribution yield to catch up with fund earnings (net of expenses) and we are already seeing an increase in monthly distributions.
We compared the performance of SPHY with that of iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK), and it came out on top in terms of both return and expense (about 0 .40% for the last two).
We have also gone ahead and done the same with the performance of all three and SPHY is leading in this case as well. It should be noted that all three are similar in terms of effective duration, i.e. 4 years, and will evolve more or less in parallel with each other. Much of the performance difference likely comes from the fact that SPHY has the lowest expense ratio of the three.
While SPHY may serve the income purpose as a small position in a diversified portfolio, with the multitude of opportunities available to us thanks to the recent volatility and market downturn, we find it difficult to make a purchase case for this one for ourselves. Just yesterday, we took advantage of an almost risk-free way to store money in our marketplace service. We have also started to take advantage of mispricings in the fixed income world to trade more profitable opportunities. When you have the full range of quality investments ready to give you the returns of a high yield bond fund, we choose the former. We’re going with a “hold” note on this one.
Please note that this is not financial advice. It may seem, seem, but surprisingly, it is not. Investors are required to do their own due diligence and consult a professional who knows their objectives and constraints.