High-yield debt typically presents elevated risk versus investment-grade bonds. This is because investors seeking higher interest payouts in their fixed income portfolios can mitigate risk to a degree with short-term holdings that are diversified within an exchange-traded fund (ETF). The following is a summary of the three best high-yielding short-term ETFs, as of March 10, 2016.
The PIMCO 0-5 Year High Yield Corporate Bond ETF
As a short-term fund with low interest rate sensitivity, the PIMCO 0-5 Year High Yield Corporate Bond ETF (NYSEARCA: HYS) also rewards investors with a distribution yield often found with the extended maturities of an intermediate high-yield fund. To minimize interest rate sensitivity, the fund keeps the majority of maturities to less than three years for a portfolio duration of 2.1. The balance of the fund’s holdings is invested in debt instruments with maturities ranging from three to five years, resulting in a distribution yield of 5.31%, a weighted average to maturity of 3.29 years and a portfolio yield to maturity (YTM) of 8.1%.
The PIMCO 0-5 Year High Yield Corp Bond ETF has $1.8 billion in assets under management (AUM), making it the fifth-largest ETF in the high-yield category. The portfolio is diversified over 379 positions with 78.32% issued by United States-based companies, followed by 7.74% issued by companies from Luxembourg. With an annual expense ratio of 0.55%, the fund is the most expensive of the high-yielding ETFs in this group. The fund has a one-year return of -4.98% and a three-year annualized return of 0.68%
The SPDR Barclays Short Term High Yield Bond ETF
With low interest rate sensitivity and a yield representative of intermediate-term maturities, the SPDR Barclays Short Term High Yield Bond ETF (NYSEARCA: SJNK) offers metrics that are similar to the PIMCO 0-5 Year High Yield Corporate Bond ETF, but it tends to trade with a slightly higher degree of volatility. The fund has portfolio duration of 2.4 and a weighted average maturity of 3.18 years. The average YTM is 9.21%, which is at the high end for ETFs in the short-term category.
This is another large fund in the high-yield ETF sector, with its AUM of $2.67 billion making it the fourth-largest fund in the category. The fund has 566 holdings with 79.31% issued from U.S. companies. The second-largest holding in the portfolio by country is Luxembourg, with 6.71%, followed by Canada, with 4.13%. The fund has the highest distribution rate in the group at 6.41%, as well as the lowest expense ratio at 0.4%. Over the last year, the fund’s return is -7.23%, and the three-year annualized return is -0.84%.
The Guggenheim BulletShares 2018 High Yield Corporate Bond ETF
Investors willing to accept a lower distribution rate in exchange for the scheduled return of principal can consider the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (NYSEARCA: BSJI). Rather than the usual perpetual open-ended ETF structure, this fund functions more like a bond, with a bullet repayment date of Dec. 31, 2018. On that date, the fund will be unwound, and principal will be returned to investors.
The fund combines the group’s lowest duration of 2.0 with a distribution rate of 5.2% and an average yield to maturity of 7.79%. Daily trading volume averages $4.1 million, which reflects the buy and hold nature of the fund. Like the SPDR Barclays Short Term High Yield Bond ETF, the top holdings by country are the United States at 83.87%, followed by Luxembourg at 6.12%. The fund has a one-year return of -3.53% and a three-year annualized return of 1.26%.
The Bottom Line
These short-term high-yielding ETFs offer low interest rate sensitivity and yields that are comparable to intermediate-term high-yield corporate bond funds. Investors looking for larger yields in this category can select between the PIMCO 0-5 Year High Yield Corporate Bond ETF and the SPDR Barclays Short Term High Yield Bond ETF. For those seeking the diverse holdings of an ETF combined with the scheduled repayment of principal similar to a bond, the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF may be an appropriate portfolio addition.