No risk, no reward—it’s a simple concept to understand, but even harder to grasp, particularly after the way the coronavirus pandemic shook up investors to the point where some decided staying in cash was a better idea. Now that economies are re-opening again, investors are more apt to dial up the risk and if they can mind the volatility, high yield exchange-traded funds (ETFs) can help complement their portfolios.
High yield investors who stayed put during the pandemic sell-off in March saw exactly how the assets would behave—they dove like equities.
“The meltdowns often coincide with economic slowdowns, when some companies that have issued high-yield — also known as junk — bonds can no longer pay their bills. Some even go bankrupt,” a NY Times article explained, noting the volatility in high yield assets. “Yet if you can tolerate the ups and downs, a high-yield mutual fund or ETF may serve a useful purpose in your portfolio. Over the longer term, such an investment can provide less-volatile returns than stock funds and better income than other bond funds.”
Despite this, high yield ETFs can give investors the necessary yield in today’s low-rate environment. In a portfolio with exposure to a broad range of assets, they can be a boon.
“High-yield bonds are much riskier than Treasuries and, to a lesser degree, investment-grade corporate securities. But a fund or ETF that invests in a broad array of them can enhance a diversified basket of investments, said Brian Moriarty, associate director for fixed income strategies at Morningstar.
“High-yield sits right in the middle and smooths your returns while increasing your yield,” Moriarty said.
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High Yield Bond ETF Options
Investors looking to add high yield bond exposure to their ETF portfolios can look at the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). Some market experts question whether this move is nothing more than a small bandage on a gunshot wound.
Investors contemplating a high yield option can take a look at the Goldman Sachs Access High Yield Corporate Bond ETF (GHYB). GHYB seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FTSE Goldman Sachs High Yield Corporate Bond Index.
The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of high yield corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.
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