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Why European High-Yield ETFs Don't Deliver

Published Wed, 15 Feb 2017 14:09:56 -0500 on Seeking Alpha

There's value and opportunity in European high-yield bonds today. But if you're considering using an exchange-traded fund (ETF) to tap into the market, you may want to think again.
The reason is simple: Europe's largest high-yield ETF has consistently underperformed the top 25% of actively managed European high-yield mutual funds. That's true whether one measures performance over the past one, three or five years.
This may be news to many investors. According to Thomson Reuters Lipper, bond ETFs were the best-selling assets within the European ETF industry last year. ETFs that invest in European corporate bonds were among the top sellers, pulling in 5.5 billion euros in 2016.
Why the rush into ETFs? Financial advisors often tell us that their clients like ETFs because they offer a low-cost and easy way to access the high-yield market and its high income potential.
That all sounds good. But when we dig a little deeper, we find that high-yield ETFs aren't as cheap or efficient as they first appear-and that's a big reason why their returns have lagged those of actively managed funds.
How Costs Can Add Up
Let's start with costs. Most ETFs passively track an index. In theory, that should keep costs down. In practice, it doesn't always work that way. This is especially so in a market like high yield, where it's a lot harder-and more costly-to replicate an... Read more