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 HYLD, ANGL, and FALN.
- The top holdings of the first of these ETFs are bonds issued by JBS USA LUX / JBS USA Finance Inc., and the top holdings of the second two are bonds issued by Carnival Corp.
There are 39 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 Index, have underperformed the broader market. They have provided a total return of 19.6% over the past 12 months compared to the S&P 500's total return of 50.0%, as of May 6, 2021. The best-performing high-yield bond ETF for Q3 2021, based on performance over the past year, is the High Yield ETF (HYLD). We examine the top 3 best high-yield bond ETFs below. All numbers below are as of May 11, 2021.
- Performance over 1-Year: 33.6%
- Expense Ratio: 1.25%
- Annual Dividend Yield: 7.27%
- 3-Month Average Daily Volume: 23,474
- Assets Under Management: $126.5 million
- Inception Date: Nov. 30, 2010
- Issuer: Exchange Traded Concepts
HYLD is an actively managed ETF that targets junk bonds with the primary goal of generating high current income. Capital appreciation is a secondary goal. As part of its risk management strategy, the fund takes into account fundamentals, factors related to the macroeconomic and business cycle environment, credit and interest rate risk, and the idiosyncratic risks of specific issuers. Its top three holdings include bonds issued by JBS USA LUX / JBS USA Finance Inc., a subsidiary of Brazil-based meat-processing company JBS SA (JBSAY). The subsidiary was set up to issue debt securities, repay existing credit facilities, and for acquisitions. The other top holdings include bonds issued by Quad/Graphics Inc. (QUAD), a commercial printing company; and shares of the PGIM High Yield Bond Fund, which invests primarily in high-yield bonds.
- Performance over 1-Year: 25.3%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 4.57%
- 3-Month Average Daily Volume: 2,363,810
- Assets Under Management: $4.9 billion
- Inception Date: April 10, 2012
- Issuer: VanEck
ANGL aims to replicate as closely as possible, before fees and expenses, the price and yield performance of the ICE U.S. Fallen Angel High Yield 10% Constrained Index. The ETF focuses on so-called "fallen angel" bonds, which are bonds that were previously considered investment grade but have been downgraded to junk status. While these bonds are higher risk than investment-grade debt, 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. ANGL may appeal to investors building a long-term portfolio or to investors making a tactical allocation in the high-yield bond market. The fund's top three holdings include bonds issued by: Carnival Corp., a leisure travel company that offers cruise ship sailings; Kraft Heinz Foods Co., a subsidiary of food and beverage company The Kraft Heinz Co. (KHC); and Sprint Capital Corp., a subsidiary of wireless communications company T-Mobile U.S. Inc. (TMUS).
- Performance over 1-Year: 24.8%
- Expense Ratio: 0.25%
- Annual Dividend Yield: 4.69%
- 3-Month Average Daily Volume: 1,072,268
- Assets Under Management: $2.4 billion
- Inception Date: June 14, 2016
- Issuer: iShares
FALN tracks the Bloomberg Barclays U.S. High Yield Fallen Angel 3% Capped Index, which is comprised of U.S. dollar denominated, high-yield corporate bonds that previously held an investment-grade rating. Like ANGL, 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 three holdings include bonds issued by Carnival; and two sets of bonds with different maturities issued by Sprint Capital.
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