Why Sector Positioning Matters Within U.S. High Yield

The positioning decisions investors make among industry sectors in U.S. high yield can have material performance implications for their portfolios. Over the past 25 years, U.S. high-yield bonds have exhibited wide variations in returns across industry sectors. And if the returns these sectors have demonstrated this year so far are any indication, 2022 is no exception.

According to a LinkedIn post from BondBloxx Investment Management, year-to-date through the end of August, there is more than a 900 basis points difference between the best-performing industry sector, energy (-6.56%), and the worst performing sector, healthcare (-15.95%). Plus, only three industries (energy, core industrial, and consumer non-cyclical) have experienced better returns year-to-date than the broad U.S. High Yield Index.

Year-to-date, energy is the best-performing sector within high yield since industry fundamentals remain strong, with high yield exploration and production companies still benefitting from oil prices well above their break-even levels. Plus, companies within the sector are generating healthy cash flows and are focused on deleveraging.

Launched in October of 2021 to provide precision ETF exposures for fixed income investors, BondBloxx was co-founded by Joanna Gallegos along with ETF industry leaders Leland Clemons, Tony Kelly, Elya Schwartzman, Mark Miller, and Brian O’Donnell. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.

In May, the firm launched three new ETFs that track ratings-specific sub-indexes of the ICE BofA US Cash Pay High Yield Constrained Index. These three new products join the suite of seven sector-specific high-yield ETFs that the high-yield fixed-income ETF issuer launched in February. The firm also has an emerging markets product and an additional eight Treasury products that allow investors to get specific duration targets.

Appearing on CNBC’s “Closing Bell: Overtime,” Gallegos said that BondBloxx was created after its founders looked at where markets were in March 2020 and saw they “need to be delivering better tools for institutional investors to manage their risk through markets like this.”

“We see this as just an opportunity to be using more precise tools, and that’s what we know the need is,” Gallegos said, adding that when it comes to high yield fixed income, it “depends on the sector.”

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