iShares, the world’s largest ETF company, filed paperwork with the Securities and Exchange Commission to bring to market two global corporate bond ETFs—one straddling the lowest-rated investment-grade credits and the highest-rated junk bonds, and the other focused solely on high-yield debt.

The iShares B-Ca Rated Corporate Bond Fund, which will own only junk bonds, will track the yield and performance of the Barclays Capital U.S. Corporate Ba-Ca Capped Index. Debt with ratings ranging from “Ba” to “Ca” spans most of the below-investment-grade spectrum.

The iShares Baa-Ba Rated Corporate Bond Fund, which includes both low-rated investment-grade bonds and junk bonds with relatively high ratings, tracks the Barclays Capital U.S. Corporate Baa-Ba Capped Index. “Baa” is a rating that is considered at the low end of investment-grade debt, and “Ba” debt is at the high end of a range of speculative or high-yield debt.

The proposed iShares funds are going into registration at a propitious time. With central banks keeping official rates low and a guardedly improved outlook in the United States, investors have regained their appetite for risk and flocked to high-yielding junk bonds.

Junk bonds, some of which are paying over 7 percent—and in some cases the low double digits—look attractive in comparison to 10-year U.S. Treasurys, which are currently yielding about 2 percent. However, although junk bonds do well at the start of a recovery, they are also vulnerable at the first sign of trouble.

The universe of securities that are eligible for inclusion in the Barclays indexes for both funds includes U.S. dollar-denominated taxable fixed-rate securities with maturities of one year or more and $500 million or more of outstanding face value issued by U.S. and non-U.S. domiciled financial, industrial and utility corporations.

To determine whether a bond qualifies for inclusion in the respective indexes, they will each look at a bond’s ratings from the three major credit rating agencies—Standard & Poor’s, Fitch and Moody’s—and choose the middle rating to determine eligibility.

Both funds will generally invest at least 90 percent of their assets in securities that comprise their underlying indexes, although at times they can invest up to 20 percent of their assets in futures and swaps.

Both funds also invest in non-U.S. issuers to the extent necessary to track their underlying indexes.

Global Exposure

As of Sept. 30, 2011, 18.20 percent of the underlying Barclays index for the Baa-Ba Corporate Bond Fund was composed of bonds issued by non-U.S. issuers from the following countries or regions: Australia, Bahrain, Belgium, Bermuda, Brazil, the British Virgin Islands, Canada, the Cayman Islands, China, Colombia, Finland, France, Germany, Hong Kong, Ireland, Japan, Luxembourg, Mexico, the Netherlands, Singapore, South Korea, Spain, the United Arab Emirates, the United Kingdom and the United States.

As of Sept. 30, 2011, 12.97 percent of the underlying Barclays index for the Ba-Ca Corporate Bond Fund was composed of bonds issued by non-U.S. issuers from the following countries or regions: Australia, Bermuda, Canada, the Cayman Islands, China, Germany, Greece, Hong Kong, Ireland, Luxembourg, the Netherlands, South Korea, the United Kingdom and the United States.