Take a Ride in the New Short Junk ETF

When you look at the profusion of new ETF’s being launched today, you find that they almost always correspond with market tops. The higher the market, the greater the demand for the underlying, and the more leverage traders bay for it. The resulting returns for investors are disastrous.

But occasionally a blind squirrel finds an acorn, if you fire buckshot long enough, you hit a barn, and even a broken clock is right twice a day. That was the case when the corn ETF was launched (CORN), after five months of stagnant performance by the grain. I smelled a bargain for my readers, piled them into the ETF the day it launched, and caught a quick double in six weeks, just as the Russian fires were igniting.

I think that we are about to see a replay with the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), I have recently turned negative on the sector. Junk bonds have moved way too far, too fast.

Current spreads for junk paper are now only 300 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk. Recent new junk yields have approached an unbelievable all time low of 5%, and “covenant light” has made a big comeback.

If the stock market starts to roll over this summer, as I expect, then the junk bond market will follow it in the elevator going to down to the ladies underwear department in the basement and below. Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market. Buy the (SJB) and you are short a 6% coupon, which works out to a monthly costs of 50 basis points, in addition to management fees and operating expenses. That is a big nut to cover. So timing for entry into this fund will be crucial.

SJB 6-3-13

CORN 6-3-13

JNK 6-3-13