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 (also 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 broad equity market over the past year.
- The high-yield bond exchange-traded funds (ETFs) with the best one-year trailing total returns are HYGH, HYGV, and HYHG.
- The top holding of HYGH is shares of the iShares iBoxx $ High Yield Corporate Bond ETF, while the top holdings of HYGV and HYHG are bonds issued by DirecTV Financing LLC and TransDigm Inc., respectively.
There are 43 high-yield bond ETFs that trade in the United States, 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 U.S. Corporate High Yield Bond Index, have underperformed the broader market over the past 12 months, providing a total return of 2.4% compared with the S&P 500’s total return of 17.0%, as of Jan. 27, 2022.
The best-performing high-yield bond ETF for the second quarter (Q2) of 2022, based on performance over the past year, is the iShares Interest Rate Hedged High Yield Bond ETF (HYGH).
We examine the three best high-yield bond ETFs below. All numbers below are as of Jan. 27, 2022.
- Performance Over One-Year: 4.2%
- Expense Ratio: 0.52%
- Annual Dividend Yield: 4.15%
- Three-Month Average Daily Volume: 14,458
- Assets Under Management: $152.1 million
- Inception Date: May 27, 2014
- Issuer: BlackRock Financial Management
HYGH tracks the BlackRock Interest Rate Hedged High Yield Bond Index, which aims to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. The fund’s goals include managing interest rate risk and adapting to changes in credit spreads in the financial markets. The ETF’s holdings are comprised almost entirely of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which account for 96.1% of HYGH’s portfolio. The remaining 3.9% is mostly interest rate swaps
HYGH’s performance, thus, is closely linked to the performance of HYG. HYG’s top holdings include bonds issued by Sprint Corp., the telecommunications company; TransDigm Group Inc. (TDG), the aerospace manufacturing and industrial products company; and Mozart Debt Merger Sub Inc., an international debt portfolio.
- Performance Over One-Year: 3.7%
- Expense Ratio: 0.37%
- Annual Dividend Yield: 5.98%
- Three-Month Average Daily Volume: 120,053
- Assets Under Management: $688.8 billion
- Inception Date: July 17, 2018
- Issuer: Northern Trust
HYGV tracks the Northern Trust High Yield Value-Scored U.S. Corporate Bond Index. The index is comprised of high yield, U.S.-dollar denominated bonds of companies selected based on fundamental qualities, market valuations, and liquidity. Bonds issued by U.S.-based companies make up more than 85% of holdings, but the fund also holds bonds issued by companies based in Canada, France, the U.K., and several other countries. Within the high-yield universe, HYGV focuses on income diversification while focusing on value and quality debt issuers.
The top holdings of HYGV include bonds issued by the following companies: DirecTV Financing LLC, a financing company associated with the programming distributor DirecTV; CSC Holdings LLC, a cable and telecommunications services holding company; and Altice Financing S.A., a financing company associated with Luxembourg-based cable television services company Altice S.A.
- Performance Over One-Year: 3.6%
- Expense Ratio: 0.51%
- Annual Dividend Yield: 5.03%
- Three-Month Average Daily Volume: 21,130
- Assets Under Management: $142.7 million
- Inception Date: May 21, 2013
- Issuer: ProShares
HYHG tracks the FTSE High Yield (Treasury Rate-Hedged) Index, an index of U.S. dollar-denominated high-yield debt issued by corporations domiciled in the U.S. or Canada. The index consists of a long position in high-yield bonds and a duration-matched short position in U.S. Treasury bonds. The short position allows HYHG to mitigate the impact of rising interest rates. More than three-quarters of the portfolio is comprised of high-yield debt in the following three sectors: industrial services, industrial manufacturing, and industrial energy.
The top holdings of HYHG include bonds issued by the following companies: TransDigm; Targa Resources Partners LP (TRGP) a provider of natural gas and natural gas liquid services; and Occidental Petroleum Corp. (OXY), an oil and gas exploration and development company.
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