Investors looking to earn higher returns may consider high-yield bonds, which come with additional credit risk. Mutual funds and ETFs are convenient ways to invest in high-yield bonds. Here’s a look at what you need to know about high-yield bonds and some top funds to consider for your investment portfolio.
Top high-yield bond funds
*Yield data below from Morningstar as of Aug. 12, 2024.
Vanguard High-Yield Corporate Fund (VWEHX)
The Vanguard High-Yield Corporate Fund focuses on medium and lower-quality corporate bonds, including higher-rated junk bonds. With approximately 880 different bonds in its portfolio, this fund offers diversification.
- Yield: 5.95 percent
- Expense ratio: 0.22 percent
- Fund assets: $24.5 billion
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
The iShares iBoxx $ High Yield Corporate Bond ETF is a popular option for investing in U.S. high-yield corporate bonds. With around 1,200 bonds in its holdings and a weighted average maturity of four years, this ETF offers exposure to the high-yield bond market.
- Yield: 5.84 percent
- Expense ratio: 0.49 percent
- Fund assets: $15.2 billion
JPMorgan BetaBuilders USD High Yield Corporate Bond ETF (BBHY)
The JPMorgan BetaBuilders USD High Yield Corporate Bond ETF aims to replicate the performance of U.S. high-yield corporate bonds. With a portfolio of over 1,400 bonds, this ETF provides broad exposure to the high-yield bond market.
- Yield: 6.65 percent
- Expense ratio: 0.15 percent
- Fund assets: $1.3 billion
SPDR Portfolio High Yield Bond ETF (SPHY)
The SPDR Portfolio High Yield Bond ETF seeks to track a high-yield bond index that includes U.S. high-yield bonds with at least one year to maturity. With a focus on bonds with a minimum amount outstanding of $250 million, this ETF offers exposure to the high-yield bond market.
- Yield: 7.72 percent
- Expense ratio: 0.05 percent
- Fund assets: $5 billion
VanEck High Yield Muni ETF (HYD)
The VanEck High Yield Muni ETF aims to replicate the performance of the U.S. high-yield long-term tax-exempt bond market. With bonds that are generally exempt from federal income taxes, this ETF offers tax-efficient income.
- Yield: 4.27 percent
- Expense ratio: 0.32 percent
- Fund assets: $3.1 billion
*Note: Municipal bond funds can be compared to taxable funds using a taxable equivalent yield, calculated by dividing the municipal yield by (1-tax rate).
What are high-yield bonds?
High-yield bonds are issued by entities with low credit ratings, often referred to as junk bonds due to their higher risk of default. While they offer higher returns than safer bonds, they also come with increased risk, especially during economic downturns when issuers may struggle to make interest payments.
Investors can earn more income relative to the bond price with high-yield bonds, but they should be aware of the potential for defaults and wider yield spreads during challenging market conditions.
Where can you buy high-yield bond funds?
High-yield bond funds are available through online brokerages, with bond ETFs typically offered by most top brokers. When investing in mutual funds, it’s important to check if your preferred broker provides access to the specific fund you’re interested in.
Bottom line
High-yield bonds can enhance portfolio returns, but they should be part of a diversified investment strategy. While high-yield bonds offer attractive yields, investors should carefully consider the risks involved and ensure that the potential returns compensate for the additional credit risk.
If you’re unsure about including high-yield bond funds in your portfolio, consulting a financial advisor can provide valuable insights into your investment strategy.
Editorial Disclaimer: Investors should conduct their own research before making investment decisions, as past performance is not indicative of future results.