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 (alternately known as "junk" bonds) also carry a greater chance of defaulting than investment-grade bonds, making them a riskier addition to a portfolio. Investors seeking to benefit from the higher interest payouts of high-yield bonds while controlling some of the risk through diversification can invest in a basket of high-yield bonds contained in exchange traded funds (ETFs).
- High-yield bonds underperformed the broader market over the past year.
- The ETFs with the best 1-year trailing total return are FALN, ANGL, and PTBD.
- The top holdings of the first two ETFs are high-yield bonds issued by Carnival Corp., and the top holdings for the third ETF are high-yield bonds issued by Ford Motor Co.
There are 41 distinct high-yield bond ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). High-yield bonds, as measured by the Bloomberg Barclays U.S. Corporate High Yield Bond Index, have underperformed the broader market. They have a total return of 6.4% over the past 12 months compared to the S&P 500's total return of 18.4%, as of November 16, 2020. The best-performing high-yield bond ETF, based on performance over the past year, is the iShares U.S. Fallen Angels USD Bond ETF (FALN). We examine the 3 best high-yield bond ETFs below. All numbers below are as of November 17, 2020.
- Performance over 1-Year: 12.7%
- Expense Ratio: 0.25%
- Annual Dividend Yield: 5.27%
- 3-Month Average Daily Volume: 131,294
- Assets Under Management: $344.8 million
- Inception Date: June 14, 2016
- Issuer: iShares
FALN focuses on high-yield bonds across all durations and from developed markets. The fund tracks the Barclays U.S. High Yield Fallen Angel 3% Capped Index, an index targeting so-called "fallen angel" bonds which were previously investment grade but have been downgraded to junk status as a result of the weakening of the issuer. Businesses suffering as a result of the COVID-19 pandemic have led to new fallen angel bonds across industries. The top holdings of FALN include high-yield bonds for Carnival Corp. (CCL), a British-American cruise operator; and high-yield bonds of two different sets of maturities for Sprint Capital Corp., a wireless telecommunications company, which was recently acquired by T-Mobile.
- Performance over 1-Year: 11.4%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 4.94%
- 3-Month Average Daily Volume: 1,449,756
- Assets Under Management: $3.4 billion
- Inception Date: April 10, 2012
- Issuer: VanEck
ANGL tracks the BofA Merrill Lynch U.S. Fallen Angel High Yield Index. Like FALN, it focuses on fallen angel bonds. While these bonds are higher risk than investment-grade alternatives, this particular fund tends to hold bonds concentrated at the higher end of the credit quality spectrum, including some bonds which may eventually be upgraded back to investment grade. Nonetheless, ANGL is likely to be most appealing to risk-tolerant investors who want to make a tactical allocation in the high-yield bond space. The fund's top holdings include high-yield bonds for Carnival; Sprint Capital; and Kraft Heinz Foods Co., a food and beverage company.
- Performance over 1-Year: 10.4%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 2.11%
- 3-Month Average Daily Volume: 125,117
- Assets Under Management: $346.6 million
- Inception Date: October 22, 2019
- Issuer: Pacer Financial
PTBD tracks the Pacer Trendpilot U.S. Bond Index, which uses a trend-following strategy to alternate exposure between the S&P U.S. High Yield Corporate Bond Index and the S&P U.S. Treasury Bond 7-10 Year Index. Unlike the other two funds above, this ETF is neither primarily focused on fallen angels nor on high-yield bonds. The fund employs a strategy that increases exposure to high-yield bonds only when those bonds are trending up, and lessens its exposure by shifting to U.S. Treasurys when they are trending down. Its top three holdings are high-yield bonds issued by Ford Motor Co. (F), an automobile manufacturer; United States Cellular Corp. (USM), a provider of wireless telecommunications services; and M.D.C. Holdings Inc. (MDH), a homebuilder and originator of mortgage loans.
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