Investors are increasingly interested in high-yield bonds, attempting to find better performance than those that government bonds can offer. The Federal Reserve, in the aftermath of the 2008 financial crisis, reduced yields on more conservative government fixed income securities, leaving many investors searching for returns elsewhere. High-yield bonds carry more risk than Treasury bonds, yet investors are forced to consider taking on this risk than dealing with the volatility of the equities market. 

Key Takeaways

  • High-yield bond funds invest in "junk" bonds—lower credit quality corporate bonds that carry a higher-than-market yield.
  • Investors look to high-yield bonds to earn a better return than low-yielding, but safer, government and highly rated corporates.
  • Owning high-yield bonds comes with particular risks unique to this part of the fixed income market. Be sure to understand the product or fund before investing.

Fidelity Capital & Income Fund (FAGIX)

Created in 1977, the Fidelity Capital & Income Fund invests in both equity and debt securities, with an emphasis on lower-quality debt securities. The fund also focuses on companies facing financial difficulties. It has $12.36 billion in assets under management (AUM) as of October 2018.

It pays a yield of 4.01%. The debt securities in the fund's portfolio have an average weighted maturity of 11.4 years with a duration of 3.75 years. This is a lower duration, which indicates the bonds have less exposure to risk from an interest rate hike. The fund has a reasonable expense ratio of 0.67% and has an average ten-year return of 9.96%.

The Fidelity Capital & Income Fund's top 10 holdings include fixed-income instruments from energy companies, financial companies, and those in the technology sector. These three sectors comprise 36.57% of their current holdings. It requires an initial minimum investment of $2,500.

Vanguard High Yield Corporate Fund Investor Shares (VWEHX)

The Vanguard High Yield Corporate Fund focuses on corporate debt with lower credit ratings. The fund manager seeks out higher-rated quality junk bonds. Vanguard states that this approach is intended to return consistent income while minimizing defaults and principal loss. The fund does have higher volatility, closer to that of the stock market.

The fund has an expense ratio of 0.23%, which is 77% lower than the average expense ratio of similar funds. The fund has net assets of $23.8 billion with a yield of 5.74 % as of October 2018. There are 484 bonds in the portfolio, with an average effective maturity of 5.4 years and an average duration of 4.2 years.

The Vanguard High Yield Corporate Fund holds 20.1% of its assets in the communications sector, followed by 12.5% in energy, and 12.3% in consumer non-cyclical. Ba2 rated bonds hold the largest portion of the portfolio at 17.2%, follows by B1 bonds at 16.1%. It requires a minimum investment of $3,000.

BlackRock High Yield Bond Fund (BHYIX)

The BlackRock High Yield Bond Fund, which began trading in 1988, invests in non-investment grade bonds with maturities of 10 years or less. At least 80% of assets are invested in high-yield bonds, which include convertible and secured securities. The fund has $15.12 billion in AUM with a yield of 5.6% as of October 2018. The bonds in the fund are 77.5% invested in corporate bonds.

Around 42% of the BlackRock High Yield Bond Fund's holdings have ratings of B, with another 18.6% of its holdings having BB ratings. The fund has over 1,500 holdings in its portfolio with an expense ratio of 0.62%. The fund distributes its yields on a monthly basis.

SPDR Barclays Capital High Yield Bond ETF (JNK)

ETFs that invest in high-yield bonds may be appropriate for investors who want to avoid the costly sales loads and minimum investment amounts that are typically associated with investing in mutual funds. The fund tracks the performance of the Barclays High Yield Very Liquid Index. The fund has net assets of $9.62 billion and pays a dividend yield of 5.56% as of October 2018.

The largest sector allocation for the fund is the energy sector, with a weighting of near 69%. The fund has an expense ratio of 0.4% and pays a yield of 5.44%. In terms of the quality of holdings, around 40% of the holdings are rated BB with 45% rated B. Around 35% of the bonds have maturities of five to seven years, with around 30% of the bonds having maturities of seven to 10 years.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

The iShares iBoxx $ High Yield Corporate Bond ETF is another high-yield bond ETF, providing broad exposure to U.S. high-yield corporate bonds. It has net assets of over $14.9 billion and pays a yield of around 5.93% as of October 2018. The fund has 1,025 holdings and an expense ratio of 0.49%.

This fund has a relatively high beta ratio, which demonstrates that it has greater volatility than some more conservative bond funds. The fund began trading in 2007.