High yield bonds can be an attractive vehicle for investors because they pay higher interest rates than investment grade bonds. On the other hand, high yield bonds (also known as junk bonds) also carry a higher chance default than investment grade bondswhich makes them a riskier supplement ka portfolios.
Investors who want to benefit from higher interest payments from high-yield bonds while controlling some of them risk over diversification can invest in a basket of high yield bonds contained in exchange traded funds (ETFs).
- High-yield bonds have lagged the broad stock market over the past year.
- The high yield exchange traded funds (ETFs) with the best annual total returns are HYGH, HYGV and HYHG.
- HYGH’s top holding is the iShares iBoxx $ High Yield Corporate Bond ETF, while HYGV and HYHG’s top holdings are bonds issued by DirecTV Financing LLC and TransDigm Inc.
There are 43 high-yield bond ETFs that trade in the United States, excluding inverse and leverage effect ETFs as well as funds with less than $50 million assets under management (AUM). High-yield bonds, as measured by the Bloomberg US Corporate High Yield Bond Index, have underperformed the broader market over the past 12 months, delivering a total return of 2.4%, compared with the S&P 500’s total return of 17.0% through January. 27, 2022.
Below, we examine three of the best high-yield bond ETFs. All numbers below are as of January 27, 2022.
- Performance in one year: 4.2%
- Expense ratio: 0.52%
- Annual dividend yield: 4.15%
- Three-month average daily volume: 14,458
- Assets under management: $152.1 million
- Start date: May 27, 2014
- Issuer: BlackRock Financial Management
HYGH tracks the BlackRock Interest Rate Hedged High Yield Bond Index, which aims to mitigate the interest rate risk of a portfolio of high yield corporate bonds denominated in US dollars. The fund’s objectives include governance interest rate risk and adapting to change credit spreads in the financial markets. The ETF’s holdings consist almost entirely of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which make up 96.1% of the HYGH portfolio. The remaining 3.9% consists mainly of interest rate swaps
Thus, HYGH performance is closely related to HYG performance. HYG’s major holdings include bonds issued by telecommunications company Sprint Corp.; TransDigm Group Inc. (TDG), a company producing aerospace and industrial products; and Mozart Debt Merger Sub Inc., an international debt portfolio.
- Performance in one year: 3.7%
- Expense ratio: 0.37%
- Annual dividend yield: 5.98%
- Three-month average daily volume: 120,053
- Assets under management: $688.8 billion
- Start date: July 17, 2018
- Issuer: Northern Trust
HYGV tracks the Northern Trust High Yield US Corporate Bond Index. The index consists of high-yield bonds denominated in US dollars of companies selected on the basis of fundamental qualities, market valuation and liquidity. Bonds issued by US-based companies make up more than 85% of holdings, but the fund also holds bonds issued by companies based in Canada, France, the UK and several other countries. Within the high yield world, HYGV focuses on income diversification while focusing on value and quality bond issuers.
HYGV’s principal holdings include bonds issued by the following companies: DirecTV Financing LLC, a financing company associated with distributor DirecTV; CSC Holdings LLC, a holding company for cable and telecommunications services; and Altice Financing SA, a financing company associated with the Luxembourg cable television company Altice SA
ProShares High Yield-Interest Rate Hedged ET (HYHG)
- Performance in one year: 3.6%
- Expense ratio: 0.51%
- Annual dividend yield: 5.03%
- Three-month average daily volume: 21,130
- Assets under management: $142.7 million
- Start date: May 21, 2013
- Issuer: ProShares
HYHG tracks the FTSE High Yield (Treasury Rate-Hedged) index, an index of high-yield debt denominated in US dollars issued by companies domiciled in the US or Canada. The index consists of a long position in high yield bonds and a short position in duration of US Treasuries. The short position allows HYHG to mitigate the impact of rising interest rates. More than three-quarters of the portfolio consists of high-yield debt in the following three sectors: industrial services, industrial manufacturing and industrial energy.
HYHG’s main holdings include bonds issued by the following companies: TransDigm; Targa Resources Partners LP (TRGP) provider of natural gas and liquid natural gas services; and Occidental Petroleum Corp. (OXY), an oil and gas exploration and development company.
The comments, opinions and analysis expressed herein are for informational purposes only and should not be construed as individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information contained herein to be reliable, we do not guarantee its accuracy or completeness. The opinions and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analysis contained in our content are provided as of the date of publication and are subject to change without notice. The material is not intended to be a complete analysis of all material facts relating to any country, region, market, industry, investment or strategy.