Oil Burden Makes Life Miserable in Junk ETF as Stocks Plod Along

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The exposure gained from exchange-traded funds is getting painful for junk-bond investors -- more than ever, when compared with stocks.

The iShares iBoxx $ High Yield Corporate Bond ETF has lost 3.7 percent in the last three months. It’s down 2.5 percent this year, its worst underperformance on record compared with the SPDR S&P 500 ETF Trust, which has gained 2.2 percent.

The reason for the gap is largely the makeup of the two indexes, with energy companies accounting for twice as much of the high-yield pool. Declining commodity prices and the prospect of higher interest rates are making junk bonds look more perilous, as concerns grow that the industry’s riskiest borrowers won’t be able to service their debt.

“We’re certainly having conversations about what the ramifications for energy and mining stocks are,” said Alex Altmann, equity-trading strategist at Citigroup Inc. in London. “Does it affect equities? Currently, no.”

With a weighting of 6.9 percent, the influence of energy companies on the Standard & Poor’s 500 Index is at its smallest in more than a decade. By comparison, oil and gas producers and the industry’s makers of services and equipment account for about 14 percent of high-yield bonds, according to data compiled by Bloomberg and UBS Group AG.

The junk-bond ETF slipped 0.2 percent at 9:51 a.m. in New York on Thursday, and the S&P 500 fund dropped 0.3 percent.

Record Borrowings

The rout in oil prices has caused investors to suspect high-yield energy companies may struggle to service the record $120 billion they borrowed in the past three years to finance production during the shale boom.

“These guys are the ones bearing the brunt of lower world prices,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management in Philadelphia. “These guys are more levered, with worse balance sheets. They’re going to feel the pressure of lower energy prices more.”

While the plunge in commodities also caused drops in U.S. stocks, the S&P 500 is still hovering within 1.5 percent of a record high. Its companies will manage to increase profit this year despite a decline in earnings at energy producers, analysts estimate.

The high proportion of commodity companies in the high-yield market represents “a large amount to move the needle and cause the rest of the industry to feel it,” said Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia.

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