Short High Yield Corporate Debt With This ETF

By | December 18, 2018

Total corporate debt is estimated to be around nine trillion dollars. There is increasing concern over how companies will manage this load as credit spreads widen.

At some point in time, rising interest rates will slow economic activity and the credit cycle will turn. Corporate profits will decline and some companies will see their investment grade debt downgraded to junk status.

There is a way to trade this gloomy outlook for corporate bond prices. Trade being the operative word.

The ProShares Short High Yield ETF (SJB) seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.

It is a short term trading vehicle whose return, because of daily compounding, will differ over time from the target index. It is not an investment vehicle because over the long term, inverse funds are likely to lose money.

It does offer an opportunity to trade a potential breakdown in the iShares $ High Yield Corporate Bond ETF (HYG) without taking a short position.

The HYG made a high in October but immediately reversed direction. It moved below its 40 week (~200 dma) moving average and has returned to support in the $26 area. The inverted image of the SJB shows the inverse fund back above its 40 wma and testing resistance in the $23.25 area.

The indicators at the bottom of the chart reflect improving SJB price and money flow momentum. But the trade is triggered by a breakdown in the HYG that is confirmed by a breakout in the SJB. Take quick profits or losses.

Again, the SJB is a trading vehicle and meant to be held for a short period of time.

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