I last covered the SPDR Bloomberg Short Term High Yield Bond ETF (NYSEARCA:SJNK), a short-term high-yield bond ETF, in late 2022. In that article, I argued that SJNK's good, growing yield and low rate risk made the fund a buy. SJNK has significantly outperformed broad bond indexes since, slightly outperformed those focused on high-yield bonds. Dividend growth has been strong too, with yields rising to 7.3%. SJNK's fundamentals remain strong, and so the fund remains a buy.
SJNK - Basics
- Investment Manager: State Street
- Underlying Index: Bloomberg US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index
- Dividend Yield: 7.32%
- Expense Ratio: 0.40%
- Total Returns CAGR 10Y: 3.59%
SJNK - Overview and Analysis
Index and Portfolio
SJNK is a simple short-term high-yield bond index ETF, tracking the Bloomberg US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. It is a simple index, if a bit wordy, including all dollar-denominated, short-term, high-yield corporate bonds meeting a basic set of inclusion criteria. It is a market-value weighted fund, with 2% issuer caps meant to ensure diversification. Nothing else stood up about the index to me.
SJNK is a reasonably well-diversified fund, with investments in almost 2,000 bonds from all relevant industry segments. Concentration is quite low too, with issuers limited to 2.0% of the portfolio, and with the top ten of these accounting for around 9.3% of the same.
SJNK seems about as diversified as most high-yield bond ETFs. As an example, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the largest high-yield bond ETF and industry benchmark, invests in only 1,200 bonds, quite a bit less than SJNK. Industry exposures are comparable. HYG does have exposure to longer-term bonds, which provides its own sort of diversification. Industry exposures are comparable.
SJNK is much less diversified than most broad-based bond index ETFs, including the Vanguard Total Bond Market Index Fund ETF Shares (NASDAQ: BND), the largest of these. BND invests in over 10,000 holdings, more than 5x those of SJNK, with exposure to several bond sub-asset classes, including treasuries, corporate bonds, and municipal bonds. SJNK only holds high-yield bonds.
Overall, SJNK seems diversified enough, but less than broader bond ETFs.
Credit Risk Analysis
SJNK focuses on short-term high-yield bonds, predominantly issued by weaker companies with low credit ratings. These are as follows:
SJNK's underlying holdings have above-average default rates, and these are somewhat dependent on underlying economic conditions. Default rates should spike during downturns and recessions, leading to above-average losses during these. As an example, SJNK saw losses of almost 20% during 1Q2020, the onset of the coronavirus pandemic. Losses were much higher than those of investment-grade bonds and treasuries. Losses were also short-lived, with the fund recovering from most of these during 2Q2020.
SJNK's credit quality seems comparable to that of HYG, and most other high-yield corporate bond ETFs. Credit quality was weaker than these in prior years, as the riskier issuers are generally forced into issuing short-term bonds / investors are loathe to extend long-term credit to riskier issuers. Unclear what precipitated this change, but credit quality does seem to have improved.
Overall, SJNK's credit quality is weak, a negative for the fund and its shareholders. Credit quality does not seem excessively weak, so this is not a deal-breaker for me. More risk-averse investors might disagree.
Interest Rate Risk Analysis
SJNK focuses on short-term high-yield bonds, with low maturities and duration. The fund itself sports a duration of only 2.2 years, significantly lower than the average bond, slightly lower than the average high-yield corporate bond.
Due to the above, the fund should significantly outperform most bonds, slightly outperform high-yield bonds, when rates are rising, as has been the case since early 2022.
SJNK should underperform when rates decline, but much will depend on the specific magnitude and timing of any potential cuts. Other issues, including dividends and default rates, play a role too. Excluding the pandemic, rates last declined during 2019, during which SJNK's performance was about average. Broader corporate bond indexes and ETFs outperformed SJNK, including those focused on investment-grade and high-yield corporate bonds.
Considering the above, SJNK is not destined to underperform once the Fed starts to cut rates. Significant rate cuts would almost certainly lead to underperformance, shallower rate cuts might not.
Dividend Analysis
Riskier bonds tend to sport high yields, and SJNK's underlying bonds are no exception. SJNK itself yields 7.3%, a strong figure on an absolute basis, and significantly higher than that of most bonds and bond sub-asset classes.
SJNK yields more than most high-yield corporate bond ETFs, including the benchmark HYG, but there are many exceptions, including the SPDR Portfolio High Yield Bond ETF (SPHY) and the FlexShares High Yield Value-Scored Bond Index Fund ETF (HYGV).
SJNK's dividends are fully covered by underlying generation of income, as evidenced by the fund's 7.6% SEC yield.
SJNK's dividends are dependent on several factors, but Federal Reserve policy and default rates are key.
Defaults means less income and assets for the fund, with higher default rates having a greater impact on both. High-yield corporate bonds have above-average default rates, so these should lead to steadily decreasing share prices and income for the fund. Most bonds do get repaid in full without issue, even riskier high-yield bonds, so I would not expect significant declines, however. SJNK's share price has declined by 16.7% since inception over a decade ago, broadly in-line with expectations. Dividends are flat but have trended downwards during most of the fund's existence.
Fed hikes generally lead to higher interest rates on most bonds, including the high-yield corporate bonds that SJNK invests in. Dividend growth has been extremely strong these past few years, due to the recent spate of hikes. Said growth has effectively cancelled out prior dividend cuts / defaults. Long-term growth has been much more anemic, as rates have declined for most of the past decade.
On a more negative note, SJNK's dividends should decline in the coming years, as the Fed cuts rates. It should take a few months for Fed cuts to materialize, a few more months for dividends to start to decline, and a few years for the process to finalize.
In my opinion, SJNK's dividends are high enough to withstand a couple rate cuts, especially considering that these should impact most other bonds too. A 7.6% yield would remain quite high even if the Fed were to cut 1.0% - 2.0%, for instance. Higher cuts would obviously have a much greater impact, but the same should be true of other bond funds.
Performance Analysis
SJNK's performance track-record is reasonably good, with some caveats.
Long-term returns have been low, as rates have been low for most of the past decade.
Returns have significantly increased in the recent past, as rates have broadly stabilized at a higher level.
Returns tend to be higher than average, except during downturns and recessions.
Returns are as follows:
Moving forward, SJNK's returns will depend on Fed policy and underlying economic conditions. I would expect higher returns than the 3.6% CAGR experienced this past decade, as rates are much higher now than in the past, and ZIRP seems unlikely to return, in the short-term at least. Returns would be materially lower during downturns and recessions, however, or if ZIPR returns.
SJNK - Alternatives
Finally, wanted to have a quick look at some alternatives to SJNK.
The iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) is broadly similar to SJNK. Expenses are lower, at 0.30%. Dividend yields are lower too, at 6.5%. SEC yields are only marginally lower, at 7.3%. Performance has been very similar since inception. SHYG and SJNK seem broadly similar choices, in my opinion at least.
SPHY is a high-yield corporate bond ETF. Expenses are much lower, at 0.05%, lowest in the sector. Dividend and SEC yields are higher, at 7.6% and 7.8%. Duration is higher, at 3.2 years. SPHY tends to outperform SJNK, exception during periods of rising rates. On net, I think that SPHY is a slightly stronger investment than SJNK, mostly due to the lower fees.
Conclusion
SJNK's strong 7.3% dividend yield and solid fundamentals make the fund a buy.
At the CEF/ETF Income Laboratory, we manage closed-end fund (CEF) and exchange-traded fund (ETF) portfolios targeting safe and reliable ~8% yields to make income investing easy for you. Check out what our members have to say about our service.
To see all that our exclusive membership has to offer, sign up for a free trial by clicking on the button below!
