iShares iBoxx High Yield Corporate Bond: is the HYG ETF a buy?

The iShares iBoxx $ High Yield Corporate Bond (HYG) ETF has done well this year as investors’ thirst for yield continues. The fund, which tracks junk bonds, has risen by almost 10% from the lowest level in 2022. It has also received strong inflows from investors, who have pushed its total assets to more than $15 billion.

How safe are junk bonds?

The iShares iBoxx $ High Yield Corporate Bond is a popular ETF that tracks the biggest high-yield corporate bonds, popularly known as junk bonds. The fund has an attractive bond yield because of the substantial risks that its constituent companies have.

There are major concerns that many junk companies will default in the coming months. As I wrote here, the biggest concern is in the commercial real estate industry (CRI). This industry is facing a double whammy where maturities are nearing while property values are dropping. As property values drops, the cost of refinancing them worsens. 

Still, iShares iBoxx $ High Yield Corporate Bond tracks some companies that have little chances of going bankrupt. Some of these companies are American Airlines, Dish Network, Teva Pharmaceutical, DirecTV, Vodafone, and SiriusXM. Other good junk bonds it holds are United Airlines, Wynn Resorts, Altice, and Ford Motors among others. In all, analysts expect default risks to rise gradually this year.

The HYG ETF has a dividend yield of 5.64%, which is lower than the High Yield ETF (HYLD), which has a yield of 8%. The latter, however, has a higher expense ratio of 1.16% compared to HYG ratio of 0.48%. This means that an investor with $10,000 in the HYG ETF pays a fee of just $48 per year. 

The only reason why I would recommend avoiding the HYG ETF is that the rising interest rates have pushed short-term bond yields higher. For example, investing in a 1-year government bond has a yield of 5.29%, which is a few points below the HYG yield. Therefore, it makes sense to invest in government bonds instead of the fund.

HYG ETF stock price forecast

HYG chart by TradingView

The daily chart shows that the iShares iBoxx $ High Yield Corporate Bond ETF has been in a slow bullish trend in the past few months. It has formed an ascending triangle pattern. The shares have moved above the ascending trendline shown in green. 

At the same time, the HYG fund has formed an ascending triangle pattern. It has also moved above the 50-day and 25-day moving averages. Therefore, there is a likelihood that the shares will likely continue rising in the near term. This view will be confirmed if the stock moves above the important resistance level at $74,90, the upper side of the triangle pattern.