Debt ratings agency Moody’s recently warned investors to tread lightly when it comes to high yield debt. After significant gains in 2019 due to a rally in bond activity, a correction could be ahead where high yield debt could post “significant” losses.
“High-yield bonds have rallied mightily despite the lack of any observable broad-based acceleration of either business sales or corporate earnings,” said Moody’s economist John Lonski. “If the anticipated improvement in the fundamentals governing corporate credit quality do not materialise, a significant widening of high-yield bond spreads is likely”.
One way to stem the tide is for investors to focus on quality, investment-grade debt that is less likely to default in a market downturn. Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
Options for High Yield
If investors still want to quench their thirst for high yield debt, they can look to ETFs like The High Yield ETF (NYSEArca: HYLD). HYLD seeks high current income with a secondary goal of capital appreciation by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper.
Another option is the VanEck Vectors Fallen Angel High Yield Bond ETF (BATS: ANGL). ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.
ANGL essentially focuses on debt that has fallen out of investment-grade favor and is now repurposed for high yield returns with the downgraded-to-junk status.
For investors seeking high-yielding income and emerging markets exposure, they can look to the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
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