High yield bonds mean more risk for more return. Funds that hold high yield bonds – sometimes called “junk” bonds – offer…
High yield bonds mean more risk for more return.
Funds that hold high yield bonds – sometimes referred to as “junk” bonds – offer investors better returns in exchange for greatest risk. This is because the bonds sold by these debt issuers are not of investment grade quality, and there is a greater chance of default. In order to attract investors, these issuers pay higher interest rates to offset the risk. “These bonds are more (vulnerable) to changes in the global economy, and prices fall more sharply than quality debt securities during times of economic crisis,” said Randy Vogel, head of fixed income at Wilmington Trust in Wilmington, Delaware. But in an environment where some super-secure US Treasuries have a yield below the rate of inflation, some income investors may be willing to accept a little extra risk for a higher yield. For those investors, here are seven high yield bond funds to consider.
IShares iBoxx $ High-Yield Corporate Bond ETF (symbol: HYG)
HYG was one of the first high yield corporate bond funds, based on a market weighted index of US high yield corporate debt. It is popular, with over $ 19 billion in assets under management, and offers a wide range of exposure to high yield US corporate bonds. HYG remains a go-to vehicle for investors looking for liquidity, as it has a daily trading volume of over 13 million shares. It primarily holds a mix of bonds rated BB and B, the two highest speculative rating groups. HYG also allocates around 11% of its bond holdings to CCC rated bonds, which are higher risk investments. Since its creation in 2007, the fund has posted an average annual return of 5.6% despite several episodes of market stress. HYG has a management fee of 0.48%, or $ 48 for every $ 10,000 invested.
ETF Xtrackers USD High Yield Corporate Bond (HYLB)
HYLB has a similar exposure to HYG, replicating an index of US dollar denominated corporate bonds with maturities of one to 15 years. It has fewer assets under management than HYG, at around $ 6.8 billion. But with it comes a much lower expense ratio – just 0.15% per annum (including a temporary fee waiver). Over the past year, the ETF has returned around 9% including dividends. HYLB spreads its holdings across different sectors, with consumer discretionary, energy and communications services holding the most weight. In terms of 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 suitable for investors who want an actively managed high yield bond fund with a good track record. The fund has an average 10-year annual return of around 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 US Corporate High-Yield 1% Issuer Capped Index. The majority of its holdings have credit ratings of BB and B. Investors can enjoy the benefits of active management for a relatively low fee of 0.54%, or about half of the average cost of mutual funds in the United States. 0.95% high yield bond.
VanEck Emerging Markets High Yield Bond ETF (HYEM)
HYEM focuses on non-sovereign issuers or bonds issued below the national level (for example, by states, provinces and cities) in the high yield emerging market bond market. This fund offers investors geographic diversification, which is beneficial as emerging markets may perform differently from developed markets. China has the largest country allocation in the fund, followed by Brazil, Turkey and Mexico. While emerging markets can be volatile, investors have the opportunity to take advantage of strong rates of economic growth. Long-term investors can add HYEM to their portfolio 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 ETFs to help increase income and portfolio performance can consider USHY. This low cost, high yield bond ETF has a net expense ratio of only 0.15%. Investors who may be wary of high yield investments should be aware that the USHY comes with diversification between credit ratings and bond maturities, which can help manage risk. Over the past year, the fund has posted a total return of approximately 10%. The credit ratings of USHY bond holdings range from BB and B to a portion of CCC rated bonds. The fund also holds bonds with variable maturities ranging from zero to 20 years and over. Owning USHY means owning one of the most actively traded ETFs in the world, with a 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 rated investment grade at issue, but which have subsequently been downgraded to speculative or high yield status. These bonds are known as “fallen angels”. ANGL has an excellent track record, with average annual total returns of around 9% since inception. Bonds that have been downgraded are typically concentrated in a certain sector, according to VanEck, and have fundamentals that have bottomed out that could potentially benefit from a rally. When credit assessors downgrade their valuation of a bond, it can cause the value to fall. But if the bond gets a credit boost, it can cause the price to rise. Over the past year, the fund has returned almost 16% on a total return basis. It has an expense ratio of 0.35%.
Fidelity High Return Factor ETF (FDHY)
FDHY is an actively managed ETF that uses a quantitative model to filter and select high yield bonds with high return potential and low probability of default. The fund includes bonds issued by US and foreign companies. What sets FDHY apart is that it is one of the first ETFs to use a factor approach to select holdings, ranking bonds by both value and quality. 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 0.45% expense ratio is low for an actively managed fund. Over the past year, FDHY has grown by 9%, including dividend payouts.
Seven high yield bond funds to consider:
– iShares iBoxx $ High-Yield Corporate Bond ETF (HYG)
– ETF Xtrackers USD High Yield Corporate Bond (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 Return Factor ETF (FDHY)
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