HYG Then And Now

Wednesday April 11 marked the five-year anniversary of when HYG began trading. When we launched HYG (the iShares iBoxx High Yield Fund) five years ago, a number of investors were skeptical. The lack of liquidity in the high yield bond space made it an asset class no ETF had dared to enter before. A Seeking Alpha article at the time declared the fund was “effectively an experiment that can only be judged over time.”

Fast forward five years and HYG is now one of the largest high-yield bond funds (including mutual funds) in the United States, with over $14.4 billion in assets under management. HYG has effectively changed how investors look at and invest in the high yield market, giving them an intra-day indicator of what the high yield market is doing.

Perhaps most remarkably, the concerns about liquidity turned out to be unfounded as HYG actually become a source of liquidity that hadn’t existed before. I’ll explain:

High yield is viewed as one of the least liquid segments of the bond market. What this means is that if you need to sell a particular security there may not be any buyers on the other end, and conversely if you’re looking to buy a specific bond there may not be any sellers available. This can make the already opaque over-the-counter market (which I’ve written about in the past) even more difficult to navigate – particularly for individual investors.

Enter HYG, which trades on the stock exchange like all ETFs. From its launch, investors saw it as a way to gain diversified access to the high yield market through the exchange. But the big moment for HYG actually came during the financial crisis of 2008. During this period OTC trading was impaired, and many investors began to turn to HYG as a way of accessing the high yield market. As an example, during December 2008, average daily trading volume for the fund increased from $6 million to $150.7 million, and just kept growing (to $277 million today). Despite periods of illiquidity in the OTC market, the ETF structure allows investors to trade high yield throughout the day on the exchange.

HYG was actually the first high yield index fund – there weren’t even any index mutual funds at the time, and many investors were skeptical about its ability to track its index. Net the management fee of 0.50%, HYG has tracked its index within 0.01% since inception [1]. That’s great tracking, especially in a volatile asset class.

So was this “experiment” a success? Well, since HYG’s launch, the high yield ETF market has grown to 13 funds and $28B in assets under management. HYG has become one of the great ETF success stories, bringing liquidity, transparency and access to a market that was previously inaccessible to many investors. So from our perspective, this is one experiment we’d do all over again.

Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.

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