Junk bond ETF investors rush for the exits

Thu Nov 15, 2012 5:41pm EST
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* Investors may be giving up more than they realize

* Junk bond ETFs lose $836 million over past month

By Jessica Toonkel

NEW YORK, Nov 15 (Reuters) - Investors are fleeing junk bond exchange traded funds in droves this month, fearing the risk of investing in these funds is not worth the reward, but the rush is exposing an ETF weakness that's reducing bottom-line returns.

Unlike ordinary mutual funds, which are priced once a day at about the exact value of their assets, ETFs trade in real time and that means prices can get out of line with true worth of their assets.

The rush of junk investors out of ETFs, almost $1 billion pulled in the last four weeks, is the biggest since June, when fears about the Greek debt crisis were at a peak. That has pushed fund prices to a discount -- investors selling now are only get 97 or 98 cents for every dollar of assets. Making the problem worse, many bought in at the end of 2011, when a crowd of buyers pushed ETF prices to premiums.

For example, investors who bought BlackRock Inc's $16.27 billion iShares iBoxx High Yield Corporate Bond ETF on Dec. 27 2011, when investors were rushing into high-yield bond ETFs, bought at the highest premium - 2.63 percent of fair value - according to an analysis conducted for Reuters by IndexUniverse LLC.

If those investors sold the ETF on Nov. 13, they would have seen investment return gains of 8.15 percent. If the ETF has been bought and sold at fair value, that figure would have been 11.21 percent.

"So you threw away 3.07 percent of your performance by buying in when there was peak demand and selling during peak panic," said Dave Nadig, director of research at IndexUniverse. "ETF investors getting out of junk bonds are getting hit harder than those who are just getting out of junk bond mutual funds.   Continued...