The popular high-yield ETFs include significant exposure to lower quality speculative-grade debt that are at greater risk to default. For instance, JNK has a 13.8% tilt toward CCC or lower-rated debt and HYG has 8.8% in CCC-rated securities.
Alternatively, fixed-income investors may consider high-yield bond funds that lean toward higher quality debt. For instance, the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) tracks so-called fallen angel, speculative-grade debt, or those bonds that were born with investment-grade ratings but were later downgraded to junk territory. Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Furthermore, since these fallen angels were formerly on the cusp of investment-grade status, this group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds. ANGL’s credit qualities include BBB 3.1%, BB 74.5%, B 13.8%, CCC 4.6% and CC 0.4%.
The PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB), which tracks the RAFI Bonds US High Yield 1-10 Index, leans toward slightly higher quality corporate debt securities than its major competitors. The underlying Research Affiliates index implements a fundamental or smart-beta indexing methodology that focuses on four factors, including gross sales, gross dividends, cash flow and book value of assets for each issuer. The end result is an index of company debt with higher credit ratings, including some low-investment-grade BBB 16%, along with speculative-grade BB 58% and B 26%. [Quality Matters in Junk Bond ETFs]
The tilt toward quality seems to be paying off as the less risky junk bond ETFs have been outpacing the much larger options. Year-to-date, ANGL rose 1.9% and PHB dipped 0.8%, whereas JNK fell 3.9% and HYG dropped 2.9%.
However, due to tilt toward higher quality debt, ANGL and PHB have lower yields. ANGL has a 5.25 year duration and a 6.52% 30-day SEC yield. PHB has a 4.31 year duration and a 5.26% 30-day SEC yield. HYG has a 4.20 year duration and a 6.97% 30-day SEC yield. JNK has a 4.38 year duration and a 7.20% 30-day SEC yield.
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.