(Bloomberg) -- Investors are returning to the world's second-biggest junk-bond ETF after pulling out nearly $2 billion over the last year.

But are they planning to stick around? The answer may be in the oil market.

State Street's SPDR Bloomberg Barclays High Yield Bond ETF (JNK) averted the worst month in its history with a rush of inflows last week. The fund still lost a hefty $926 million in assets in March, leaving it with just under $11.5 billion. It's had only five worse months since its inception in 2007. And the outflows continued this week as a new month began. In the past 12 months, JNK has lost $1.8 billion of assets.

The asset movements largely track oil prices. Energy and commodity producers make up 23% of the Bloomberg Barclays High Yield Very Liquid Index, which the ETF tracks. The fund suffered massive outflows in late February and early March, as a slump in oil combined with strong junk bond issuance that reduced demand for the debt, according to Mohit Bajaj, a director of ETF trading solutions at WallachBeth Capital in New York.

"Whenever you see outflows in high-yield everyone hits the door at once, but then when you see inflows, they're always more gradual and that's what's happening now," Bajaj said.

U.S. companies sold $39.4 billion of high-yield debt in March, the most since December and up from an 11-month low in January, according to data compiled by Bloomberg. This had a dramatic effect on the fund, as the new supply enabled investors who were holding the ETF as a high-yield placeholder to abandon those positions and buy the debt directly.

State Street agrees that crude and high level of issuance hurt JNK's assets last month. As for the longer-term outflows, Bill Ahmuty, head of the firm's ETF fixed-income group, said "investors may be looking at historical high-yield spreads to see whether they're rich or cheap. But while markets move up and down, the ETF product continues to operate as designed and is facilitating investors entering and exiting the market."


JNK's performance is in stark contrast to its bigger rival, BlackRock's iShares iBoxx High Yield Corporate Bond ETF (HYG), which has attracted $457 million over the past year. The difference is in the type of investor who buys each fund, according to Sebastian Mercado, a strategist for ETFs at Deutsche Bank.

The BlackRock high-yield fund competes for daily volume with the most traded stocks in the market, like Exxon Mobil. In light of this extraordinary liquidity, HYG also is the preferred junk-bond ETF for institutional investors to use for everything from hedging to shorting. As such, its inflows often don't reflect the actual demand for high-yield debt.

A more fundamental reason to explain JNK's outflows may be that high-yield debt prices have become frothy as more than 30% of the junk bonds that are callable next year are trading above the value where the company can repurchase them.


"On a relative value standpoint, high-yield might be looked at as expensive relative to other reflationary assets within portfolios," Stephen Cohen, global head of fixed income beta at BlackRock, said in a recent interview.

In addition, junk debt may be not high-yielding enough to entice investors. Average spreads are around 3.9%, not far from their lowest level since 2014, the Bloomberg Barclays U.S. Corporate High Yield Bond Index shows.

While some junk-bond investors are driven by yield, compressing credit spreads often provide a stronger nudge for inflows as they signal improving credit conditions and higher risk appetite, Deutsche's Mercado. For JNK to see prolonged inflows, oil prices have to stay strong and spreads must keep narrowing, he said.

"The tactical, short term investor is returning to the asset class while strategic investors are still waiting to see whether there is real improvement or if this is a temporary bounce and the roller coaster will head lower again," Mercado said.

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