High-yield bonds mean more risk for more return.
Funds that hold high-yield bonds — sometimes called “junk” bonds — offer investors greater yield in exchange for greater risk. That’s because the bonds sold by these debt issuers aren’t investment-grade, and there is a greater chance of default. In order to attract investors, these issuers pay out higher interest rates to compensate for the risk. “These bonds are more (vulnerable) to changes in the overall economy, and prices suffer steeper declines than investment-grade debt during times of economic stress,” says Randy Vogel, head of fixed income at Wilmington Trust in Wilmington, Delaware. But in an environment where some ultrasafe U.S. Treasury notes have a lower yield than the inflation rate, some income investors may be willing to accept a little extra risk for the higher yield. For those investors, here are seven high-yield bond funds to consider.
iShares iBoxx $ High-Yield Corporate Bond ETF (ticker: HYG)
HYG was one of the first high-yield corporate bond funds, tracking a market-weighted index of U.S. high-yield corporate debt. It is popular, with more than $19 billion in assets under management, and offers a broad range of exposure to high-yield U.S. corporate bonds. HYG remains a go-to vehicle for investors who want liquidity, as it has daily trading volume of more than 13 million shares. It mainly holds a mix of BB-rated and B-rated bonds, the two highest speculative-grade rating groups. HYG also allocates about 11% of its bond holdings to CCC-rated bonds, which are higher-risk investments. Since the fund’s inception in 2007, it has an average annual return of 5.6% despite withstanding several episodes of market stress. HYG has a management fee of 0.48%, or $48 for every $10,000 invested.
Xtrackers USD High-Yield Corporate Bond ETF (HYLB)
HYLB has similar exposure to HYG, tracking an index of U.S.-dollar-denominated corporate junk bonds with one to 15 years remaining to maturity. It has fewer assets under management than HYG does, at about $6.8 billion. But it comes with a much lower expense ratio — only 0.15% annually (including a temporary fee waiver). Over the past year, the ETF has returned about 9%, including dividends. HYLB allocates its holdings across different sectors, with consumer discretionary, energy and communication services holding the most weight. By weighting, the fund’s largest holdings include bonds issued by companies such as Carnival Corp. (CCL) and Ford Motor Co. (F).
PGIM High-Yield Fund (PHYZX)
PHYZX is a mutual fund suited for investors who want an actively managed high-yield bond fund with a good track record. The fund has 10-year average annual return of about 7%. So, if you added $10,000 to PHYZX in 2011, by 2021, your money would have roughly doubled. PHYZX seeks to replicate the performance of its benchmark, the Bloomberg Barclays U.S. Corporate High-Yield 1% Issuer Capped Index. The majority of its holdings have credit ratings of BB and B. Investors can get the benefits of active management for a relatively low fee of 0.54%, which is about half the average high-yield-bond mutual fund fee of 0.95%.
VanEck Emerging Markets High-Yield Bond ETF (HYEM)
HYEM focuses on nonsovereign issuers or bonds issued below the national level (for example, by states, provinces and cities) in the high-yield emerging markets bond market. This fund provides investors with country diversification, which is beneficial since emerging markets can move differently than developed markets do. China has the largest country allocation in the fund, followed by Brazil, Turkey and Mexico. While emerging markets can be volatile, investors have the possibility of capturing strong rates of economic growth. Long-term investors can add HYEM to their portfolio’s mix with a relatively affordable expense ratio of 0.4%.
iShares Broad USD High-Yield Corporate Bond ETF (USHY)
Investors looking for a core fixed-income ETF to help increase portfolio income and performance can consider USHY. This low-cost, high-yield bond ETF has a net expense ratio of just 0.15%. Investors who may be wary of high-yield investments should know that USHY comes with diversification across credit ratings and bond maturities, which can help manage risk. Over the past year, the fund has posted about a 10% total return. USHY bond holdings’ credit ratings range from BB and B to a chunk of CCC-rated bonds. The fund also holds bonds of varying maturities, from zero to 20-plus years. Holding USHY means owning one of the most actively traded ETFs globally, with 30-day average trading volume of over 1.6 million shares, which means this high-yield fund is a liquid investment.
VanEck Vectors Fallen Angel High-Yield Bond ETF (ANGL)
The ANGL fund tracks an index of bonds that were rated investment-grade at issuance but were later downgraded to speculative-grade status, or high-yield. These bonds are known as “fallen angels.” ANGL has a great track record, with average annual total returns of about 9% from inception. Bonds that have been downgraded are usually concentrated in a certain sector, according to VanEck, and have fundamentals that have bottomed out that could potentially benefit from recovery. When credit raters downgrade their assessment of a bond, it can cause the value to fall. But if the bond gets a credit upgrade, it can lead to price appreciation. Over the past year, the fund has returned nearly 16% on a total-return basis. It has an expense ratio of 0.35%.
Fidelity High-Yield Factor ETF (FDHY)
FDHY is an actively managed ETF that uses a quantitative model to screen and choose high-yield bonds with strong return potential and a low chance of defaulting. The fund includes bonds issued by U.S. and foreign corporations. What makes FDHY stand out is that it is one of the first ETFs to use a factor-based approach to select holdings, ranking bonds by both value and quality metrics. The fund also uses an index to assess the credit quality and risk of each bond. The fund is about three years old and has about $280 million in assets under management. The expense ratio of 0.45% is low for an actively managed fund. In the past year, FDHY is up 9% including dividend payouts.
Seven high-yield bond funds to consider:
— iShares iBoxx $ High-Yield Corporate Bond ETF (HYG)
— Xtrackers USD High-Yield Corporate Bond ETF (HYLB)
— PGIM High-Yield Fund (PHYZX)
— VanEck Emerging Markets High-Yield Bond ETF (HYEM)
— iShares Broad USD High-Yield Corporate Bond ETF (USHY)
— VanEck Vectors Fallen Angel High-Yield Bond ETF (ANGL)
— Fidelity High-Yield Factor ETF (FDHY)
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