High yield bonds mean more risk for more return. Corporate bond funds can be separated into two distinct categories: investment grade…
High yield bonds mean more risk for more return.
Corporate bond funds can be separated into two distinct categories: investment grade securities and below investment grade securities. The former usually have a credit rating of BBB or higher, but have lower yields. The latter have much higher yields but take on a greater risk of default with lower credit ratings. They are commonly referred to as high yield or “junk” bonds. Compared to investment grade corporate bonds, treasury bills and municipal bonds, high yield bonds often have a higher correlation to the stock market. When markets crash, high-yield bonds often fall too, as the creditworthiness of their issuers becomes a concern. That being said, they can offer high and attractive returns, especially as bond yields continue to climb. 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 lower quality debt securities from various US companies selected for above average liquidity by tracking the Bloomberg High Yield Very Liquid Index, which contains a total of 1 248 different shows. The top holdings of the exchange-traded fund, or ETF, are bonds rated Ba1 (15.5%) and Ba3 (22.2%) by Moody’s, which translates to BB+ and BB- ratings 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 its underlying bonds if held to maturity. In terms of interest rate risk, JNK has a low duration of 4.12 years, which means that if rates increase by 1%, it should lose 4.12% in net asset value, and vice versa if rates are falling. JNK costs an expense ratio of 0.4%, or about $40 per year for every $10,000 invested.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
HYG is like JNK in that it passively tracks a wide range of high yield corporate debt issues in the United States. It even has a similar yield to maturity of 8.9% and a 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 is remarkable 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 wide range of fixed income funds and expertise, HYS being a prime example. This ETF tracks a high yield corporate bond index with a shorter effective duration of 2.32 years, which may be desirable for investors looking to minimize interest rate risk. For treasury bills, the most common way to achieve higher yields is to increase the duration. For corporate bonds, investors can instead obtain good returns by lowering the credit quality. For example, 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 further mitigate interest rate risk 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 much less sensitive to changes in interest rates. With a yield to maturity of 9.97%, this ETF still has above-average income potential. 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 bond ladder. This can be detrimental to investors whose risk tolerance changes over time, because their bond ETF’s interest rate risk does not change with them. A good way around this is BSJN, which is 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 is paid out to investors. Think of them as a way to access single bonds in the form of ETFs, eliminating the hassle of buying individual issuers and the interest rate risk if they’re held to maturity. deadline. 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 previously investment-grade corporate debt issues 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 the return of these companies, which, if realized, would cause the value of their bonds to rise as their old credit ratings are restored. A convenient way to buy fallen angel bonds is through 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 the time of issuance. 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 most popular fallen angel bond ETF so far, having attracted $2.9 billion higher in assets under management.
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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7 Best High Yield Bond Funds originally appeared on usnews.com
Update 10/25/22: This story has previously been published and has been updated with new information.