Investors who are willing to take on more credit risk can use high-yield bonds as a means to earn higher returns, and the simplest way to invest in this market is through mutual funds or ETFs. In addition, here is some additional information regarding high-yield bonds, as well as some of the best funds to consider for your investment portfolio.
What are high-yield bonds?
Issuers of high-yield bonds have poor credit ratings as evaluated by bond rating agencies like Moody’s, Standard & Poor’s and Fitch. These bonds are classified as non-investment grade or high-yield if they have ratings that fall below a specific threshold. Due to their low credit quality, high-yield bonds are also popularly known as junk bonds and have a higher risk of default.
Investing in high-yield bonds can be risky, but it also offers the potential for higher returns compared to safer bonds. These non-investment grade bonds have higher yields than government bonds, which means investors can earn more income relative to the bond’s price.
Please be aware that high-yield bonds may not be a safe investment option during economic downturns or recessions. This is because more issuers may default on their interest payments, causing the yields to increase and the bond prices to decrease. This happens as investors demand higher returns to offset the increased risk.
Top high-yield bond funds
Vanguard High-Yield Corporate Fund (VWEHX)
The Vanguard High-Yield Corporate Fund focuses on investing in medium to lower-quality corporate bonds, sometimes called “junk bonds.” The fund managers aim to invest in bonds they consider to be of a higher rating within the “junk bond” category. Currently, the fund has around 800 different bonds in its portfolio.
Yield: 6.70 percent
Expense ratio: 0.23 percent
Fund assets: $23.3 billion
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
This iShares ETF is a commonly selected fund for high-yield bonds that seeks to follow the investment performance of a U.S. index consisting of corporate bonds with a high yield. By May 2023, the fund had 1,200 bonds with an average maturity of roughly five years.
Yield: 7.85 percent
Expense ratio: 0.48 percent
Fund assets: $14.6 billion
JPMorgan BetaBuilders USD High Yield Corporate Bond ETF (BBHY)
The JPMorgan ETF is designed to mimic the investment results of a U.S. high-yield corporate bonds index. As of May 2023, the fund includes over 1,000 bonds, some being issued by Transdigm, American Airlines, and Occidental Petroleum.
Yield: 8.46 percent
Expense ratio: 0.15 percent
Fund assets: $312.6 million
SPDR Portfolio High Yield Bond ETF (SPHY)
The goal of the SPDR Portfolio High Yield Bond ETF is to track the investment performance of a high-yield bond index. This index includes U.S. high-yield bonds that have a minimum of one year left until maturity and a minimum amount outstanding of $250 million, among other criteria.
Yield: 8.50 percent
Expense ratio: 0.10 percent
Fund assets: $1.1 billion
VanEck High Yield Muni ETF (HYD)
The VanEck High Yield Muni ETF aims to replicate the investment results of an index that monitors the U.S. market for tax-exempt, long-term bonds with high yields. This fund consists of bonds that are generally free from federal income taxes, resulting in a lower yield than taxable funds.
Yield (5/11/23): 4.44 percent
Expense ratio: 0.35 percent
Fund assets: $2.8 billion
*Note: Investors use a taxable equivalent yield to compare municipal bond funds with taxable funds. This can be calculated by dividing the municipal yield by 1 minus the tax rate.
Including high-yield bonds in your portfolio may increase your returns, but it is important to have a diversified portfolio before doing so. Although bonds are typically less volatile than stocks, high-yield bonds carry more risk, which makes them behave similarly to stocks. Therefore, you should carefully consider whether the added returns from high-yield bonds outweigh the additional risk, especially compared to bonds with higher ratings.
Suppose you’re unsure whether high-yield bond funds are suitable for your portfolio. In that case, it’s recommended that you consult a financial advisor who can assist you in evaluating your overall financial plan.