The prospect for income generation in high yield ETFs has increased significantly with the past year’s run-up in yields. But when targeting high yield, investors should be shrewd and selective when picking their entry points. That’s where fixed income specialist BondBloxx Investment Management can help.
Launched in October of 2021 to provide precision ETF exposure for fixed income investors, BondBloxx has three ratings-specific high-yield bond ETFs. These funds can serve as good entry points into high yield, depending on an investor’s risk tolerance—and what they expect for the U.S. economy.
“Many advisors think of high yield as simply a risk-on investment style,” said VettaFi’s director of research Todd Rosenbluth. “However, there are ETFs that allow a more targeted approach providing exposure to higher- or lower-quality, high-yield bonds based on risk tolerance.”
See more: “Don’t Wait for Wider Spreads to Target Fixed Income”
A Fund For Every Risk Tolerance
Investors worried about weakening economic conditions may want to consider the BondBloxx BB-Rated USD High Yield Corporate Bond ETF (XBB). XBB seeks to invest in bonds rated BB1 through BB3.
XBB is the least exposed to this risk among the high-yield rating categories and the broad high-yield index. It also has the lowest default risk in high yield, with an average default rate of 1%, according to Moody’s.
Meanwhile, some believe the risk of a recession during the second half of 2023 is overblown. For those investors, the BondBloxx B-Rated USD High Yield Corporate Bond ETF (XB) may be a good fit. XB seeks to invest in bonds rated B1 through B3.
Over the past year, the run-up in XB’s yield has improved its total return potential in a soft-landing scenario. So, investors expecting corporate defaults to end 2023 at or below the long-term average should consider XB. Current spread levels are reflective of this potential default risk and represent a yield/spread pickup over both the broad high-yield index and BBs.
BondBloxx co-founder Joanna Gallegos described single-Bs as “the Goldilocks of high yield,” since they’re “less rate-sensitive than double-Bs and… less idiosyncratic risk than triple-Cs.”
Another option for investors believing recession risk is overblown is the BondBloxx CCC-Rated USD High Yield Corporate Bond ETF (XCCC). XCCC seeks to invest in bonds rated CCC1 through CCC3. The fund currently offers a significantly higher yield-to-worst, nearly 14%, compared to broad U.S. high yield exposure inside 9.0%.
Year-to-date, CCCs have been the best-performing credit quality tier across high-yield and investment-grade corporates, generating over 7% in total return. They’re also the highest yielding sector, with a yield-to-worst of 13.54% as of April 28.
For more news, information, and analysis, visit the Institutional Income Strategies Channel.