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July 31, 2015 at 01:31 PM
Are ETFs that invest in high yield debt (junk bonds) like the SPDR Barclays High Yield Bond ETF (JNK) weapons of mass destruction?
Outspoken billionaire investor Carl Icahn thinks so.
Icahn recently sparred with CEO Laurence D. Fink at the CNBC Institutional Investor Delivering Alpha Conference, saying, “This thing is going to go over this cliff and you know what’s going to destroy it? They’re going to hit a black rock.”
Fink, who heads up BlackRock, sponsor of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), took issue with Icahn’s views, labeling them as “dead wrong.”
HYG ($13.95 billion) and JNK ($9.92 billion) are the two largest high-yield bond ETFs by assets.
Bonds with a credit rating of BBB− and lower are typically categorized as high-yield or junk bonds because of their speculative nature. Although yields on junk bonds are usually juicier compared with investment-grade debt, investors absorb larger risks because companies issuing high-yield debt have poor or unestablished credit.
The point of Icahn’s contention is that daily trading volume in high-yield bond ETFs is masking the fact that most bond issues in the underlying index are illiquid and rarely trade. As a result, Icahn claims, ETFs give investors an illusion of liquidity to “extremely illiquid and extremely overpriced” securities.
