Goldman Unveils Junk Bond ETF Just as High-Yield Exodus Deepens

  • Firm plans to avoid the most indebted, burdened issuers
  • Junk fund outflows reached $5.7 billion in past week: Lipper

It’s said that timing is key to launching a successful exchange-traded fund. If so, Goldman Sachs Group Inc. picked an odd moment to reveal its latest offering.

The New York-based finance firm is planning an ETF that will invest in high-yield corporate debt, according to documents filed Thursday with the U.S. Securities and Exchange Commission. That’s despite an ongoing exodus from junk bonds that saw $5.68 billion in fund assets desert the securities in the week ended March 15, the most since August 2014, according to Lipper U.S. Fund Flows data.

“One hurdle they may face with this launch is timing,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “This is a huge factor for new products and investors have been fleeing high yield ETFs lately.” 

A junk bond fund run by State Street Corp. lost $1.1 billion of assets last week, the most since December 2015, data compiled by Bloomberg show. BlackRock’s high-yield bond ETF also suffered, hemorrhaging $1.4 billion in the week through March 10, the most in almost five months. Both have however booked inflows this week.

Investors are recoiling from riskier assets amid a mix of deteriorating credit fundamentals for retailers and energy companies and higher interest rates from the Federal Reserve, which will make it harder to refinance debt.

Quality Junk

But Goldman has a trick up its sleeve: its fund will steer clear of the most indebted issuers and those that are likely struggle to repay their borrowings. Basically, it’s looking for the highest quality junk available.

The ETF will track an index of dollar-denominated bonds sold by U.S. or Canadian companies, the filing shows. Issuers that have the lowest debt service and leverage metrics within each of three broad industry groups will be excluded from the benchmark.

The bank currently has just one bond ETF -- investing in U.S. Treasuries -- alongside six stock funds. It is also planning a local currency-denominated fund of sovereign debt. The emerging-market focused ETF will buy bonds from nations with the best money supply growth and balance of trade.

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