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 pay for it. The resulting returns for investors are disastrous.
But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.
That’s why I am getting interested in the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.
Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.
If the stock market starts to roll over this summer, then the junk bond market will follow it in the elevator going down to the ladies underwear department in the basement.
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 6.74% coupon, which works out to a monthly costs of more than 50 basis points. That is a big nut to cover. So timing for entry into this fund will be crucial.