HYS PIMCO 0 to 5 Year High Yield Corporate Bond Index ETF

While the equity ETF world looks to be nearly tapped out in terms of growth, the number of bond funds hitting the market continues to surge to new heights. These funds now target a variety of international bond segments including floating, foreign, and all spots along the curve giving investors quality exposure to pretty much any class of bonds that are in the world today. In continuing with this trend, State Street, in a recent release to the SEC, revealed plans to develop a brand new short-term junk bond ETF. While key points such as the proposed ticker or expense ratio were not available, we have highlighted some of the key information from the filing below:

The proposed fund looks to track the Barclays Capital [0-5 Cash Pay Constrained High Yield] Index with a sampling strategy. This means that the fund may purchase a subset of the securities in the index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the Index. With this focus, the fund will consist of securities that are rated below investment grade and are dollar denominated and fixed rate. The bonds must also have a remaining maturity of less than five years regardless of optionality and have at least $350 million of issuance (read Top Three High Yield Bond ETFs).

If approved, the fund could see inflows from a number of investors but especially those who are looking to increase yields but are unwilling to boost duration risk. This could be an important consideration in the years ahead, especially if the Fed is forced to move rates closer to a level that is more in line with historical averages. When this happens, investors who are tilted towards low duration securities will likely do better than most and could emerge relatively unscathed from a bear market in fixed income (see Do You Need A Floating Rate Bond ETF?).

Nevertheless, the proposed fund from State Street looks to face a significant amount of competition from many other products in the space. Beyond broad—and extremely popular-- high yield funds such as HYG and JNK, there is actually already an entrant in the short term high yield space; the PIMCO 0-5 Year US High Yield Corporate Bond Index Fund (HYS). This fund, which has amassed $140 million in assets in just about six months on the market, looks to pose as a formidable competitor to any new entrant for State Street. As a result, the proposed fund looks to be in a real fight, unless of course it can manage to beat out the PIMCO fund’s 55 basis point expense ratio or offer up a better selection than HYS and its 136 security portfolio (also read The Best Bond ETF You Have Never Heard Of).

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