7 Best High-Yield Bond Funds

High-yield bonds mean more risk for more return.

Corporate bond funds can be separated into two distinct categories: investment grade and below investment grade. The former generally have a credit rating of BBB or higher but have lower yields. The latter have much higher yields but take on greater default risk with lower credit ratings. They’re commonly called high-yield, or “junk,” bonds. Compared to investment-grade corporate bonds, Treasury bonds and municipal bonds, high-yield bonds often have a higher correlation with the stock market. When markets crash, high-yield bonds often tumble too as the creditworthiness of their issuers becomes a concern. That being said, they can offer enticingly high income, especially as bond yields continue their upward march. Here are seven of the best high-yield bond funds in 2022.

SPDR Bloomberg High Yield Bond ETF (ticker: JNK)

JNK offers high-yield bond investors a passively managed index of non-investment-grade debt from various U.S. companies screened for above-average liquidity by tracking the Bloomberg High Yield Very Liquid Index, which holds a total of 1,248 different issues. The largest holdings in the exchange-traded fund, or ETF, are bonds rated Ba1 (15.5%) and Ba3 (22.2%) by Moody’s, which translates to a BB+ and BB- rating by S&P and Fitch, respectively. Currently, JNK has a yield to maturity of 9.35%, which is the approximate weighted-average yield of all of its underlying bonds if held to maturity. In terms of interest rate risk, JNK has a low duration of 4.12 years, meaning that if rates rise by 1%, it is expected to lose 4.12% in net asset value, and vice versa if rates fall. JNK costs an expense ratio of 0.4%, or about $40 annually per $10,000 invested.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

HYG is like JNK in that it passively tracks a broad range of U.S. high-yield corporate debt issues. It even has a similar yield to maturity of 8.9% and duration of 4.17 years. However, HYG tracks a different index, which could make it a suitable tax-loss harvesting partner for JNK. Its holdings are 51.4% in BB-rated bonds and 34.3% in B-rated bonds. What’s notable about HYG is its well-developed options chain. Thanks to its high volume, the ETF is one of the most popular choices for investors looking to trade options on high-yield bonds. HYG costs an expense ratio of 0.48%.

Pimco 0-5 Year High Yield Corporate Bond Index ETF (HYS)

Pimco is known for its extensive fixed-income fund lineup and expertise, with HYS being a prime example. This ETF tracks an index of high-yield corporate bonds with a shorter effective duration of 2.32 years, which may be desirable for investors looking to minimize interest rate risk. For Treasury bonds, the most common way to obtain higher yields is by increasing duration. For corporate bonds, investors can obtain good yields by lowering credit quality instead. Case in point, despite its low duration, HYS has a yield to maturity of 9.18%. This is due to the lower credit quality of its holdings, which are mostly concentrated from BB+ to as low as CCC+. HYS charges an expense ratio of 0.55%.

SPDR Bloomberg Short Term High Yield Bond ETF (SJNK)

Investors who like JNK but are looking to mitigate interest rate risk further can opt for SJNK. SJNK tracks the Bloomberg US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index, which is designed to capture high-yield bonds with lower interest rate risk. This gives the ETF a duration of 2.51 years, making it far less sensitive to interest rate changes. With a yield to maturity of 9.97%, this ETF still has the potential for above-average income. In terms of credit quality, the majority of the ETF comprises debt rated from BA1 to B3. Like JNK, SJNK costs an expense ratio of 0.4%. It can also be a suitable tax-loss harvesting partner for HYS.

Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN)

The average bond ETF targets a fixed maturity and duration by constantly rolling over a ladder of bonds. This can be detrimental to investors who have changing risk tolerances over time, as the interest rate risk of their bond ETF does not change with them. A good way around this is BSJN, part of Invesco’s suite of BulletShares bond ETFs. These ETFs only hold bonds with a certain maturity date. When the bonds expire, the ETF is liquidated and its net asset value paid out to investors. Think of them as a way to access single bonds in ETF form, which eliminates the hassle of buying individual issuers and interest rate risk if held to maturity. BSJN in particular tracks a portfolio of high-yield corporate bonds maturing in 2023 and costs an expense ratio of 0.42%. The yield to maturity is 8.03%.

iShares Fallen Angels USD Bond ETF (FALN)

“Fallen angel” bonds are a special type of high-yield corporate bond. This term refers to the debt issues of previously investment-grade companies that have since been downgraded. Their advantage over regular high-yield bonds is greater upside potential. Investors who buy fallen angel bonds are essentially betting on these corporations making a comeback, which, if realized, would cause their bonds to surge in value as their former credit rating is restored. A hands-off way of buying fallen angel bonds is via FALN, which has a duration of 5.09 years and an average yield to maturity of 8.5%. The ETF costs an expense ratio of 0.25%.

VanEck Fallen Angel High Yield Bond ETF (ANGL)

A potential tax-loss harvesting partner for FALN is ANGL, which tracks the ICE US Fallen Angel High Yield 10% Constrained Index. Like FALN, ANGL holds high-yield corporate bonds that were previously rated investment grade at time of issue. Its holdings are very similar to FALN, with a comparable duration of 5.39 years and a yield to maturity of 7.98%. However, the ETF is slightly more expensive, with an expense ratio of 0.35%. ANGL is the more popular fallen angel bond ETF so far, having attracted higher assets under management of $2.9 billion.

7 best high-yield bond funds:

— SPDR Bloomberg High Yield Bond ETF (JNK)

— iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

— PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS)

— SPDR Bloomberg Short Term High Yield Bond ETF (SJNK)

— Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN)

— iShares Fallen Angels USD Bond ETF (FALN)

— VanEck Fallen Angel High Yield Bond ETF (ANGL)

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