IBHF: A Different Spin On High Yield Investing (BATS:IBHF)

I find it interesting that there are ETFs which have a set life, designed to mature like bonds without reinvestment to maintain a specific duration on a continuous basis. These types of ETFs are appealing because of their liquidity and diversification through a swath of bonds that mature at some time in the future. And one ETF that’s designed this way is the iShares iBonds 2026 Term High Yield and Income ETF (BATS:IBHF). The primary investment objective of IBHF is to provide investment results that track an index of US dollar-denominated, high-yield and other income-paying corporate bonds that are set to mature in 2026. This approach is not only more transparent but allows bondholders to efficiently manage interest rate risk, allowing them to potentially customize their bond ladder using ETFs instead of individual positions.

A Look At The Holdings

No position makes up more than 2.67% of the fund, making this well-diversified overall.

In terms of the maturity breakdown, the bulk matures in the 1 to 2-year range. Again – this is a bond fund that will mature, so don’t expect to be holding this for years. This could be an advantage, especially at this point in the cycle. Note that the credit quality is on the riskier side overall. It makes more sense I think to consider a set term bond ETF like this than a continuous junk debt fund given default risk which could rise for issuers should there be concerns around refinancing risk on rolled over new debt.

Sector Breakdown

As to the sector breakdown, nothing is surprising here given the credit quality being targeted by the fund. The biggest allocation goes to Consumer Cyclicals at 23.31%, followed by Energy at 12.98% and Communications at 10.80%. The sector composition is interesting here. If you expect the yield curve inversion (longest in history) to be a warning of recession, then you should worry about the exposure to consumer cyclical debt issuances. However, because this is not rolling over debt to maintain a continuous duration/position, a fund like this may actually hold up okay as bonds get “pulled to par” so long as defaults in a recession are minimal for these companies.

Peer Comparison

It’s hard to really make a good comparison on this fund to another one that also would mature at a later date, so it may be worth considering how it looks versus the SPDR Bloomberg High Yield Bond ETF (JNK) to see how it has performed against a fund that does NOT have a set maturity date. When we look at the price ratio of IBHF to JNK, it has outperformed. Again, this makes some sense as there really is no reinvestment risk given the set life IBHF has relative to JNK.

Weighing the Pros and Cons

On the positive side, the fund offers a new way of serving high-yield bond investors with a set maturity structure and guaranteed income distributions on a regular basis. This makes IBHF attractive for the construction of a bond ladder or the deployment of a more sophisticated interest rate risk management strategy. IBHF’s portfolio is also highly diversified, which reduces concentration risk and offers exposure to a wide variety of high-yield bond issuers. The fund provides transparency and tradability with a set term.

But then again, high-yield bonds are riskier than corporate bonds that don’t provide the same large dividends. There is meaningful credit risk here should a dislocation in bond markets occur on the repricing of default risk. And remember that IBHF’s maturity structure means that it will turn to cash and cash equivalents at the end of its targeted maturity period in 2026.

Conclusion

I think these kinds of funds are interesting. You know the ETF won’t reinvest its holdings, and has a set term after which it will cease to trade and turn to cash. And with a 30-Day SEC Yield of 7.54%, it’s got a nice income that, although it won’t last forever, seems to be fairly solid for now. Nonetheless, I still find this part of the marketplace broadly risky, though I do think the set maturity profile helps that a lot. Should default risk rise, it’s better in my view to know that the bonds you’re holding are getting closer to par for payment, and the ETF wrapper in this case provides comfort in just that.

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