State Street Adds Junk Bond Rungs to Laddered ETF Series

My, oh my. State Street is adding high-yield bond ETFs to its MyIncome bond ladder fund suite.

The firm is prepping five target-maturity exchange-traded funds, according to paperwork recently filed with the Securities and Exchange Commission. It’s a small product category with only iShares and Invesco having high-yield target-maturity ETFs on the market. The kicker is that State Street’s forthcoming ETFs will be actively managed, adding to a product line that debuted last year, including corporate and municipal bond ETFs with maturities ranging from 2026 to 2035.

That product set is intended to build bond ladders that “regardless of the market environment or the direction of interest rates, can potentially help build more reliable income streams,” State Street’s chief business officer Anna Paglia said at the time. 

Rung by Rung

State Street rolled out its 16-fund MyIncome series last year, and the products collectively represent about $217 million. The pending addition of the target-maturity high-yield ETFs comes as asset managers have shown more interest in the riskier bond category. Vanguard, for example, added its first actively managed high-yield ETF last month, a fund that differs significantly from a comparable mutual fund strategy in its line. However, it’s also not an ideal time for high-yield bonds. “High yield ETFs may appear appealing, but right now the spreads say something else,” said Charles Urquhart, founder of Fixed Income Resources. “BBB bonds are priced almost as if they were AAAs, and high-yield trades close to the tightest levels in decades. That’s not a recipe for being paid to take risk.”

There are two families of target-maturity high-yield ETFs on the market, according to Morningstar Direct data:

• The $3.5 billion Invesco BulletShares high-yield series includes ETFs with maturities ranging from 2025 to 2033.
• The $2.5 billion iShares iBonds Term High-Yield and Income series has ETFs with maturities from 2025 to 2032.

Where Interest Is Climbing: Though high-yield spreads are tight, target-maturity is helpful, said Timothy Calkins, co-chief investment officer at Nottingham Advisors Asset Management. “Target maturity ETFs are helpful when trying to capture some performance from rolling down the yield curve, or trying to match up portfolio cash flows with expected future withdrawals,” he said. The product category also lets advisors mimic bond ladders without having to build them with individual securities, Urquhart said. “[C]lients can watch real maturities roll down, get principal back on time and have reinvestment flexibility,” he said. “It’s a handy tool in a market where trading individual bonds is still difficult for most advisors.”