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 their risks through diversification can invest in a basket of high-yield bonds contained in exchange traded funds (ETFs). The high-yield bond market, as represented by the benchmark Bloomberg Barclays US Corporate High Yield Index, has significantly underperformed the broader market in the past year. The Index has provided 1-year trailing total returns of 5.0% as compared with 24.8% for the S&P 500 as of September 2, 2020.

Key Takeaways

  • The high-yield bond market has dramatically underperformed the broader market in the past year.
  • The ETFs with the best 1-year trailing total return are FALN, ANGL, and FDHY.
  • The top holdings of these ETFs are high-yield bonds for Carnival Corp., Carnival Corp., and SBA Communications Corp., respectively.

Excluding inverse and leveraged funds, as well as those with under $50 million in assets under management (AUM), there are 38 high-yield bond ETFs available. The best high-yield bond ETF for Q4 2020 is the iShares U.S. Fallen Angels USD Bond ETF (FALN). Below, we'll take a look at the top 3 high-yield bond ETFs for Q4 2020 based on 1-year trailing total returns. All data aside from the performance figures above are as of September 5, 2020.

iShares U.S. Fallen Angels USD Bond ETF (FALN)

  • 1-Year Trailing Total Return: 9.6%
  • Expense Ratio: 0.25%
  • Annual Dividend Yield: 5.29%
  • 3-Month Average Daily Volume: 81,135
  • Assets Under Management: $254.1 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 US 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 for FALN include high-yield bonds for Carnival Corp. (CCL), the British-American cruise operator; and two different sets of high-yield bonds for Sprint Capital Corp., the wireless telecommunications company which was recently acquired by T-Mobile.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)

  • 1-Year Trailing Total Return: 9.2%
  • Expense Ratio: 0.35%
  • Annual Dividend Yield: 4.96%
  • 3-Month Average Daily Volume: 1,183,014
  • Assets Under Management: $3.1 billion
  • Inception Date: April 10, 2012
  • Issuer: VanEck

Like FALN, ANGL is an ETF focused 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 most appealing to risk-tolerant investors looking to make a tactical allocation in the high-yield bond space. The top holdings for ANGL include high yield bonds for Carnival and two sets of bonds for Sprint Capital.

Fidelity High Yield Factor ETF (FDHY)

  • 1-Year Trailing Total Return: 8.7%
  • Expense Ratio: 0.45%
  • Annual Dividend Yield: 4.90%
  • 3-Month Average Daily Volume: 29,591
  • Assets Under Management: $114.2 million
  • Inception Date: June 12, 2018
  • Issuer: Fidelity

FDHY invests at least 80% of fund assets into high-yield bonds. The fund holds intermediate-term high-yield bonds from developed markets and does not track an index. Approximately 85% of FDHY holdings are from North America, with 86% of bond holdings of intermediate maturities. The top holdings for FDHY include high-yield bonds for SBA Communications Corp. (SBAC), a REIT investing in wireless communications infrastructure; Transdigm Inc. (TDG), a maker of aircraft components; and Molina Healthcare Inc. (MOH), a managed healthcare and insurance company.