(Bloomberg) -- BlackRock Inc. alumni bidding to shake up the world of junk-debt investing are launching their first slate of ETFs, just as money managers flee the industry’s biggest credit strategy at a record pace.
Seven exchange-traded funds from BondBloxx Investment Management that carve U.S. high-yield bonds into industries from telecom to energy begin trading on the NYSE Arca Thursday. It marks the first time investors can take bets on a whole sector in one consolidated trade -- and it’s landing in the midst of a rate-spurred exodus from risk assets.
Bloomberg’s U.S. junk bond index has dropped 4.2% in 2022 so far, though losses are far from uniform. Spreads have widened between 10% for energy borrowers and 35% for technology firms. BondBloxx executives say this is exactly the kind of market dispersion their new ETFs are designed to exploit.
“One of the reasons investors are selling out of broad-based exposures is to allocate with better precision within the asset class,” Leland Clemons, one of the firm’s co-founders, said in an interview.
Most of the team behind Larkspur, California-based BondBloxx have at some point worked for BlackRock, the world’s largest ETF issuer. The group also includes former JPMorgan Asset Management and State Street Corp. executives. Their plan is to fill a gap between individual bond transactions and existing ETFs that offer only broad exposures.
Part of the bet is that the bond market will finally catch up with equities in terms of electronic sophistication and transparency, potentially pushing more traders to ETFs. A recent industry survey by PricewaterhouseCoopers showed most respondents see the global ETF boom continuing until 2026, with demand for fixed-income products expected to be “especially dominant” in the U.S.
For now, corporate bond ETFs are reeling from soaring expectations the Federal Reserve will tighten policy to arrest inflation at decade highs. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) -- the largest of its kind -- has been hit by almost $4.3 billion of outflows this year. That’s more than in any other quarter since its inception 15 years ago.
Against that backdrop, some issuers are racing to offer protection. Among other ETF launches this week is the Simplify High Yield PLUS Credit Hedge ETF (CDX), which combines junk bond exposure with a credit hedging strategy.
Still, BondBloxx is betting that investors are seeking more targeted exposure. In addition to the sector funds, the startup’s next step is to launch three ratings-focused strategies within U.S. speculative-grade debt. It may also launch credit funds with international exposures.
“Targeted exposure will help them allocate risk more effectively in an environment that’s more volatile,” said Clemons.
All seven sector funds have an annual expense ratio of 0.35%. They comprise:
- BondBloxx US High Yield Industrial Sector ETF (XHYI)
- US High Yield Telecom Media & Technology Sector (XHYT)
- US High Yield Healthcare Sector (XHYH)
- US High Yield Financial and REIT Sector (XHYF)
- US High Yield Energy Sector (XHYE)
- US High Yield Consumer Cyclicals Sector (XHYC)
- US High Yield Consumer Non-Cyclicals Sector (XHYD)
