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 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 broad equity market over the past year.
- The high-yield bond exchange-traded funds (ETFs) with the best one-year trailing total returns are HYLD, HYGV, and FALN.
- The top holdings of these ETFs are shares of the PGIM Global High Yield Fund, bonds issued by CSC Holdings Ltd., and bonds issued by Occidental Petroleum Corp., respectively.
There are 40 high-yield bond ETFs that trade in the United States, 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 US Corporate High Yield Index, have underperformed the broader market, providing a total return of 9.8% over the past 12 months compared to the S&P 500’s total return of 34.5%, as of Aug. 6, 2021. The best-performing high-yield bond ETF for the fourth quarter (Q4) of 2021, based on performance over the past year, is the High Yield ETF (HYLD).
We examine the three best high-yield bond ETFs below. All numbers are as of Aug. 6, 2021.
- Performance Over One-Year: 17.7%
- Expense Ratio: 1.29%
- Annual Dividend Yield: 7.66%
- Three-Month Average Daily Volume: 21,257
- Assets Under Management: $132.2 million
- Inception Date: Nov. 30, 2010
- Issuer: Exchange Traded Concepts
HYLD is an actively managed ETF that targets junk bonds. Its primary goal is to generate high current income rather than chase capital appreciation, and it takes a value-based approach to credit selection, focusing on the less competitive, smaller-issuer portion of the market. As part of its risk management strategy, the fund takes into account a number of factors, including the macroeconomic and business cycle environments, credit and interest rate risks, and the idiosyncratic risks of specific issuers.
HYLD’s top holdings include shares of the PGIM Global High Yield Fund (GHY), which invests in high-yield bonds from issuers around the world, including in emerging markets; shares of the PGIM High Yield Bond Fund (ISD), which primarily invests in high-yield bonds; and bonds issued by JBS USA LUX/JBS USA Finance Inc., a subsidiary of Brazil-based meat-processing company JBS SA (JBSAY) that was set up to issue debt securities, repay existing credit facilities, and for acquisitions.
- Performance Over One-Year: 12.4%
- Expense Ratio: 0.37%
- Annual Dividend Yield: 5.85%
- Three-Month Average Daily Volume: 74,123
- Assets Under Management: $382.2 million
- Inception Date: July 17, 2018
- Issuer: Northern Trust
HYGV tracks the Northern Trust High Yield Value-Scored US Corporate Bond Index, which gauges the performance of a broad range of high-yield corporate bonds that have been screened for value, quality, and liquidity. The ETF uses a methodology to rate bond issuers based on factors such as valuation, solvency, management efficiency, and profitability. It also imposes caps on individual bonds, issuers, sectors, and other characteristics.
The fund’s largest allocation is in bonds issued by companies operating in the industrial sector, and a little over one-third of its bond holdings have seven- to 10-year maturities.
HYGV’s top holdings include bonds issued by the following companies: CSC Holdings Ltd. (C06), a Singapore-based holding company that provides cable and telecommunications services; Weatherford International PLC (WFRD), a provider of oil field equipment and services; and NFP Corp., a provider of insurance brokerage and consultancy services.
- Performance Over One-Year: 12.3%
- Expense Ratio: 0.25%
- Annual Dividend Yield: 4.13%
- Three-Month Average Daily Volume: 862,525
- Assets Under Management: $3.0 billion
- Inception Date: June 14, 2016
- Issuer: BlackRock Financial Management
FALN tracks the Bloomberg Barclays US High Yield Fallen Angel 3% Capped Index, which is composed of U.S. dollar-denominated high-yield corporate bonds that previously held an investment-grade rating. The bonds held by this ETF are considered fallen angels, having lost their investment-grade status and been re-rated as junk. These bonds have historically exhibited a higher credit quality than the rest of the high-yield bond market.
The fund invests in high-yield bonds of different durations across developed markets. Its top holdings include bonds issued by the following companies: Occidental Petroleum Corp. (OXY), an oil and gas exploration and production company; Sprint Capital Corp., a subsidiary of wireless communications company T-Mobile US Inc. (TMUS); and Kraft Heinz Foods Co., a subsidiary of food and beverage company The Kraft Heinz Co. (KHC).
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