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 IBHB, HYHG, and HYZD.
- The top holdings of these ETFs are bonds issued by Morgan Stanley, American Airlines Group Inc., and Gray Escrow Inc., respectively.
There are 48 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 U.S. Corporate High Yield Bond Index, have underperformed the broader market over the past 12 months, providing a total return of -6.7% compared with the S&P 500's total return of -2.5%, as of Aug. 17, 2022. The best-performing high-yield bond ETF, based on performance over the past year, is the iShares iBonds 2022 Term High Yield and Income ETF (IBHB).
We examine the three best high-yield bond ETFs below. All numbers below are as of Aug. 17, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Performance Over One Year: 0.9%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 3.61%
- Three-Month Average Daily Volume: 31,256
- Assets Under Management: $100.8 million
- Inception Date: May 7, 2019
- Issuer: BlackRock Financial Management
IBHB seeks to track the Bloomberg 2022 Term High Yield and Income Index, an index composed of U.S. dollar-denominated high-yield and other income-generating corporate bonds that mature in 2022. The ETF provides exposure to high-yield and BBB-rated corporate bonds maturing in 2022. About 55.6% of the bonds held by the fund have a credit rating of BBB, which is investment grade. After cash and derivatives, the sectors with the largest allocations within the fund are banking, consumer non-cyclical, and electric.
After cash and derivatives, IBHB's top three holdings are bonds issued by the following companies: Morgan Stanley (MS), the investment and financial services company; Eaton Corp. (ETN), an American-Irish power management company; and Credit Suisse Group Funding (Guernsey) Ltd., which is owned by Credit Suisse Group AG (CS), the investment bank.
- Performance Over One Year: 0.9%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 5.03%
- Three-Month Average Daily Volume: 19,313
- Assets Under Management: $135.3 million
- Inception Date: May 21, 2013
- Issuer: ProShares
HYHG tracks the FTSE High Yield (Treasury Rate-Hedged) Index, an index of U.S. dollar-denominated high-yield debt issued by corporations domiciled in the U.S. or Canada. The index consists of a long position in high-yield bonds and a duration-matched short position in U.S. Treasury bonds. The short position allows HYHG to mitigate the impact of rising interest rates. High-yield debt in the industrial services sector makes up over 47% of the fund's portfolio, followed by high-yield debt in the industrial energy and utility telecom sectors.
After a U.S. dollar and unspecified corporate bond component, the top holdings of HYHG are bonds issued by the following companies: American Airlines Group Inc. (AAL), the international air carrier; DISH DBS Corp., the communication services company; and Organon Finance 1 LLC, an affiliate of the pharmaceutical company Organon & Co. (OGN).
- Performance Over One Year: 0.3%
- Expense Ratio: 0.43%
- Annual Dividend Yield: 4.17%
- Three-Month Average Daily Volume: 102,536
- Assets Under Management: $200.2 million
- Inception Date: Dec. 18, 2013
- Issuer: WisdomTree
HYZD tracks the WisdomTree U.S. High Yield Corporate Bond, Zero Duration Index. The fund combines long positions in bonds represented in the index with a short position in Treasury securities in order to target zero duration. The fund aims to be a tool to combat rising interest rates and reduce interest rate risk in a broader portfolio.
After a U.S. dollar component, the top holdings of HYZD include bonds of the following companies: Gray Escrow Inc., a subsidiary of Gray Television Inc. (GTN), the television broadcasting company; Sirius XM Radio Inc., a subsidiary of Sirius XM Holdings Inc. (SIRI), the satellite broadcasting company; and Tenet Healthcare Corp. (THC), the healthcare services company.
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