As can be seen in the chart here, price changes in the HYG, JNK, and PHB ETFs are far more volatile than those in the SNLN and BKLN ETFs.Price performance: High yield bond ETFs versus leveraged loan bond ETFs

Although both high yield bonds and leveraged loans are issued by non-investment grade institutions, investors differentiate between the two while investing based on the nature of their returns. Since bonds carry fixed interest rates, their payout remains the same, even in a rising interest rate environment. For this reason, while high yield bonds do quote a higher nominal return, their real return is much lower in inflationary conditions.

On the other hand, leveraged loans and leveraged loan ETF investors do not suffer in terms of real returns as their payout is pegged to LIBOR, that is, if LIBOR increases, their payout increases, and vice versa. They also have some surety in terms of their investment being backed by the issuing company’s assets. Consequently, the issuer company also does not need to pay a premium as high as in the case of high yield bonds to sell these securities. So, loans have lower quoted yields than high yield bonds.

The investors in both cases, react in a similar way to interest rate changes, but the magnitude of change may differ. Since the real returns of high yield bond ETF investors are affected more strongly by interest rate volatility than leveraged loan ETF investors, whose investment is backed by some surety, high yield ETF investors react more strongly to market interest rate changes, as is evident from the chart above.

Latest articles

With AES stock trading close to a decade high, investors must be wondering if the stock has any steam left. In this series, we'll look at its earnings growth, valuation, and outlook.

In another setback for Boeing (BA), China might not buy the company's 737 MAX jets as part of its trade negotiations with the US.

19 Mar

Micron Stock's Ups and Downs

WRITTEN BY Paige Tanner

Micron was the hardest hit by the semiconductor downturn due to weak economic demand arising from the US-China trade war.

19 Mar

What to Expect from CannTrust's Q4 Earnings

WRITTEN BY Adam Jones

CannTrust (CTST) announced that it's scheduled to report its fourth-quarter earnings on March 28 before the market opens.

Yesterday, Apple (AAPL) launched a newly upgraded range of its iPad Air and iPad mini devices ahead of its March 25 special event.

19 Mar

Nike Gears Up to Deliver Its Q3 2019 Results

WRITTEN BY Sharon Bailey

Nike (NKE) is scheduled to report its earnings results for the third quarter of fiscal 2019 after the market closes on March 21.