High-yield corporate bond Exchange-Traded Funds (ETFs), often referred to as “junk bond” ETFs, offer a way for investors to access higher income streams than those available from investment-grade corporate bonds or U.S. Treasuries. These funds primarily invest in corporate debt rated below ‘BBB-‘ by S&P/Fitch or ‘Baa3’ by Moody’s—debt from companies perceived to have a higher risk of default, hence the higher yield.
Investing in this asset class requires a careful balance between the attractive yield potential and the inherent credit risk. This white paper reviews top US High-Yield Bond ETFs, analyzing their structure, cost, and risk profiles.
Table of Contents
Understanding the US High-Yield Market
The core attraction of US high-yield corporate bonds is the yield advantage, or “spread,” they offer over safer fixed-income assets. This spread is the compensation investors demand for taking on greater credit risk.
- Credit Risk: The main risk is default. In an economic downturn, high-yield issuers are more likely to struggle with debt payments, leading to capital losses for bondholders.
- Interest Rate Sensitivity (Duration): High-yield bonds generally have a shorter duration than investment-grade or long-term Treasury bonds. This makes them less sensitive to changes in overall interest rates, as their price movements are often driven more by changes in credit spreads than by changes in the risk-free rate.
- Correlation: High-yield bonds exhibit a higher correlation with equity markets (stocks) than with safer bond sectors. They are often viewed as a hybrid asset class, offering bond-like income with stock-like price volatility.
Primary US High-Yield ETF Recommendations
The following are some of the largest and most liquid ETFs providing broad exposure to the US high-yield corporate bond market, suitable for core allocation:
| Ticker | ETF Name | AUM (Approx.) | Expense Ratio (ER) | Key Feature / Index |
|---|---|---|---|---|
| HYG | iShares iBoxx $ High Yield Corporate Bond ETF | Very Large | ~0.49% | Tracks the Markit iBoxx USD High Yield Index. High liquidity and trading volume. |
| JNK | SPDR Bloomberg High Yield Bond ETF | Very Large | ~0.40% | Tracks the Bloomberg High-Yield Very Liquid Index. A major benchmark competitor to HYG. |
| USHY | iShares Broad USD High Yield Corporate Bond ETF | Large | ~0.08% | Tracks a broader index with a significantly lower expense ratio than HYG/JNK. |
| SPHY | SPDR Portfolio High Yield Bond ETF | Large | ~0.05% | The lowest expense ratio of the major funds, often preferred by cost-sensitive investors. |
Deep Dive into Core High-Yield ETFs
The choice among the core high-yield ETFs (HYG, JNK, USHY, SPHY) often comes down to cost and liquidity:
- Cost-Efficiency (USHY & SPHY): Funds like USHY and SPHY are notable for their extremely low expense ratios. Over long periods, lower fees significantly enhance total returns. USHY also benefits from a broader number of holdings (around 1,900+ bonds), offering more diversification than its competitors.
- Liquidity (HYG & JNK): HYG and JNK are the oldest and most traded. They maintain massive Assets Under Management (AUM) and high daily trading volumes, making them the most liquid options for large institutional investors and those concerned with tight bid-ask spreads.
Targeted and Factor-Based High-Yield ETFs
Beyond the core, numerous ETFs employ specific strategies to target different segments of the high-yield market, aiming to optimize the risk-reward profile:
1. Short-Duration High-Yield ETFs
These funds focus on bonds with shorter maturities (typically 0-5 years), significantly reducing interest rate risk (duration) while still capturing high yields. They are generally less volatile than their longer-duration counterparts.
- SHYG (iShares 0-5 Year High Yield Corporate Bond ETF): Offers a high-yield income stream with minimal interest rate exposure, making it popular in rising-rate environments.
2. Quality and Multi-Factor High-Yield ETFs
These ETFs apply screening factors to select the ‘better’ quality high-yield issuers, aiming to reduce default risk without overly sacrificing yield.
- HYDW (Xtrackers Low Beta High Yield Bond ETF): Focuses on bonds that have historically exhibited lower price volatility (beta), which may lead to a smoother return path.
- HYUP (Xtrackers High Beta High Yield Bond ETF): Conversely, this fund targets higher-beta bonds, seeking greater capital appreciation potential during economic expansions, though with higher risk.
- FDHY (Fidelity Enhanced Yield ETF): An actively managed fund that uses a factor-based approach to select bonds based on value and quality characteristics from the junk bond universe.
3. Alternative Credit Exposure
Some funds invest in related, higher-yielding fixed-income segments:
- CLO ETFs (e.g., JBBB, CLOI): These invest in Collateralized Loan Obligations (CLOs). CLOs are securities backed by a pool of corporate loans, offering high yields. CLO ETFs can provide exposure to floating-rate debt, which acts as a hedge against rising short-term interest rates.
- Preferred Securities (e.g., FPEI): These funds invest in preferred stocks, which are often classified as a hybrid between stocks and bonds. They offer higher yields but are structurally different from corporate bonds.
Risk Management and Portfolio Implementation
High-yield corporate bond ETFs are best viewed as a satellite holding for investors who want to enhance portfolio income while maintaining an overall moderate risk tolerance.
- Economic Cycle Impact: High-yield bonds perform best during economic expansions when corporate profitability is strong and the risk of default is low. They can perform poorly during recessions.
- Allocation: Many financial advisors recommend treating high-yield bonds more like an equity allocation than a traditional fixed-income allocation due to their higher correlation with stocks.
- Credit Spread Monitoring: The Option-Adjusted Spread (OAS) is a crucial metric. A widening spread indicates increased investor fear and often signals a higher buying opportunity, whereas a tightening spread suggests optimism and potentially less attractive entry points.