Buyers Should Be Aware of Falling Commodity Prices
With so many energy and basic materials companies’ credit ratings having been downgraded in the face of weakness in commodity prices, investors in the high yield space should take note of changes to the pertaining indexes. Bonds that were previously rated investment grade may have been pushed down to the high yield segment, while those of the highest quality in the junk bond spectrum could have been pushed down to the B and CCC areas, denoting even riskier fare.
So what does this mean, then? While it’s important for high yield investors to understand how the indexes’ composition has changed when comparing to them for benchmarking purposes, those actually invested in passively-managed vehicles tracking an index (like most high yield ETFs) need to be particularly mindful of the exposure they are getting. The sector and industry shift, due to more downgrades of commodity-based companies’ credits, can leave investors with exposure that is markedly different than what was originally desired. For example, according to data from Bloomberg, the PIMCO 0-5 Year High Yield Corporate Bond ETF has a 4% weighting in the energy sector, while the PowerShares Fundamental High Yield Corporate Bond ETF has an energy weighting over 14%.
Bottom line, buyers should be aware of falling commodity prices and the effect that would have on the composition of high yield indexes.