High-yield bond risk is similar to equities.
Funds that hold high-yield bonds — sometimes called “junk” bonds — offer investors greater yield but also greater risk because the bonds sold by these debt issuers aren’t investment-grade. Todd Soltow, co-founder of Frontier Wealth Management, says the risk in high-yield bonds “correlates a lot better to the risk we normally associate with equities.” However, in an environment where some ultra-safe U.S. Treasury notes have a lower yield than the current inflation rate, some income investors may be willing to accept a little extra risk for the higher yield on their investment. For investors willing to take a little extra risk for a higher yield, here are seven high-yield bond funds to consider.
iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG)
HYG was the first high-yield corporate bond fund, and it tracks a market-weighted index of U.S. high-yield corporate debt. Todd Rosenbluth, director of exchange-traded fund research for CFRA, says it remains the “go-to” vehicle for investors who want liquidity as it has the greatest assets under management, at around $30 billion. He says it has a mix of BB- and B-rated bonds. “The liquidity of the underlying bonds is a priority,” he says. The fund has been around since 2007, so it has withstood several episodes of market stress and continues to be liquid. Rosenbluth says while it’s the biggest, HYG isn’t the cheapest — at an annual cost of 0.49%, or $49 for every $10,000 invested.
Xtrackers USD High Yield Corporate Bond ETF (HYLB)
HYLB has similar exposure to HYG, tracking an index of U.S. dollar-denominated corporate junk bonds with one to 15 years remaining to maturity. It has less assets under management compared with HYG, at around $6 billion versus $30 billion, but it comes with a much lower expense ratio, at only 0.15% annually. “It has gotten large enough that it’s relatively liquid,” Rosenbluth says, noting that it doesn’t trade as much as HYG. That may make it a better option for buy-and-hold investors versus those who want to actively trade in the high-yield market. By weighting, some of the fund’s largest holdings include bonds issued by troubled companies such as Carnival Corp. (CCL).
PGIM High Yield Fund (PHYZX)
For investors who want an actively managed high-yield bond mutual fund, Rosenbluth recommends PHYZX. “It has generated a good track record,” he says. “It tends to take on a little bit more credit risk than the benchmark.” PHYZX has a 12-month yield of 6.18% and an effective duration of 4.06 years, so it is less likely to be affected by changes in interest rates. The majority of its holdings are in the BB and B rating of credit quality. Rosenbluth says investors can get the benefits of active management for a relatively low fee of 0.53%, which is about half of the average high-yield bond mutual fund fee of around 1%.
Vanguard High-Yield Corporate Fund (VWEHX)
Vanguard is known for its passively managed funds, but VWEHX is an actively managed mutual fund, Rosenbluth says. VWEHX tends to be more conservatively managed than other high-yield bond funds, as he notes that the credit quality leans a little bit stronger. VWEHX has a small holding of investment-grade AAA and BBB funds. Rosenbluth says the fund “tends to be a little bit less volatile than its peers as a result, which is also appealing.” He adds that it’s an extremely cheap fund, with an expense ratio of 0.23%. What’s more, U.S. News ranks VWEHX as the No. 3 high-yield bond fund.
Metropolitan West High Yield Bond Fund (MWHYX)
Ken Innis, chairman of The R.O.W. Group, says MWHYX is one of a couple of high-yield bond funds that he uses. It has a very strong year-to-date, one-year and three-year track record, handily beating its benchmark — the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index — and outperforming or competing closely with its category over the same time frames. Innis says the fund has a strong total return, which includes both price appreciation and yield. “These guys seem to have a pretty good head on their shoulders about how they go about developing what they’ve done,” he says. MWHYX has a low effective duration of 3.19 years and has nearly 20% of its holdings in investment-grade debt, too.
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
The $3 billion ANGL fund tracks an index of bonds that were rated investment-grade at issuance but later downgraded to junk status. When credit raters downgrade their assessment of a bond, it can cause the value to fall — but if the bond gets a credit upgrade, it can lead to price appreciation. This year’s recession has led to more than $140 billion in new fallen angel high-yield bonds, which may have led to forced selling. Soltow says the issuer, VanEck, “has got a great track record.” The fund is up 4% year to date. IShares offers a fund with a similar strategy called the iShares Fallen Angels USD Bond ETF (FALN), but it has a much lower AUM at around $250 million.
Fidelity High Yield Factor ETF (FDHY)
FDHY is an actively managed ETF that uses a quantitative model to screen and choose high-yield bonds with strong return potential and a low chance of defaulting. The fund includes bonds issued by U.S. and foreign corporations. Innis says he’s a “big fan of Fidelity.” What makes this ETF stand out is that FDHY uses a factor-based approach to select holdings, ranking bonds by both value and quality metrics. The fund also uses an index to assess the credit quality and risk of each bond. The fund is just about 2 years old, with $115 million or so in AUM and an expense ratio of 0.45%. Year to date, FDHY is up nearly 4%.
Seven high-yield bond funds to consider:
— iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
— Xtrackers USD High Yield Corporate Bond ETF (HYLB)
— PGIM High Yield Fund (PHYZX)
— Vanguard High-Yield Corporate Fund (VWEHX)
— Metropolitan West High Yield Bond Fund (MWHYX)
— VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
— Fidelity High Yield Factor ETF (FDHY)
Debbie Carlson has more than 20 years experience as a journalist and has had bylines in Barron’s, The Wall Street Journal, the Chicago Tribune, The Guardian, and other publications. Follow her on Twitter at @debbiecarlson1.