“This exclusion may help improve the fund’s risk-adjusted performance,” Bryan said. “Investors reaching for yield may be tempted to tilt toward the lowest-grade bonds and, in their quest for income, push the prices of these bonds above their fair values.”
Over the past 10-years, BB-rated debt provided better risk-adjusted returns, compared to investment-grade and lower-quality debt securities.
PHB also comes with a 3.24% 30-day SEC yield. High-yield, junk bond yields over benchmark Treasuries have been pushed down as investors piled back into fixed-income options this year. The tighter credit spread reflects the improving confidence investors have in riskier debt in an expanding economy. According to the S&P, the default rate on U.S. speculative-grade debt was 2.1% in 2013, compared to the 4.3% historical average. [Bond ETFs Beloved in 2014]
“This sensitivity to the business cycle causes high-yield bonds to behave more like equities than investment-grade bonds,” Bryan added.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG.