These exchange-traded funds own bonds issued by corporations with shaky balance sheets.
The iShares iBoxx $ High Yield Corporate Bond (HYG) ETF has done well over the past decade, with an annualized total return of not quite 6%, two points better than the overall bond market. Does that make it a good buy? As likely as not, it means just the reverse.
The past return on junk bonds is high in part because their prices today are high. In other words, yields are meager in comparison to the yields on safe Treasury bonds. You can easily get a 5% current income off a collection of junk IOUs, but if you lose 2% of principal every year to defaults, your return shrinks to 3%. You might be better off in those safe Treasurys.
If you do take a flier on junk, pay attention to costs. The two big funds, HYG and the SPDR Bloomberg Barclays High Yield Bond (JNK) ETF, are both moderately expensive. (HYG has a steeper expense ratio but shaves it with deft securities lending.)
Cheapest in this ranking: iShares Interest Rate Hedged High Yield Bond (HYGH), benefitting from a very large lending revenue stream. Among highly liquid junk funds, the one from DWS (Deutsche Bank’s wealth management arm), Xtrackers USD High Yield Corporate (HYLB), is very attractive.
Be prepared for a painful shrinking of liquidity in the next recession. During a credit crash, bid/ask spreads will widen on bonds from less creditworthy corporations, and so spreads on ETFs will gap wider, too.
Best ETFs: Junk Bonds
| Ticker | Exchange-Traded Fund | Holding Cost1 | Liquidity Score2 | Assets ($bil) |
| HYGH | iShares Interest Rate Hedged High Yield Bond* | $164 | B | 0.3 |
| FALN | iShares Fallen Angels USD Bond | 256 | C | 0.1 |
| HYLB | Xtrackers USD High Yield Corp Bd | 257 | A | 1.3 |
| SHYG | iShares 0-5 Year High Yield Corp Bd | 291 | A | 3.7 |
| SHYL | Xtrackers Short Duration High Yld Bd | 343 | C | 0.03 |
| USHY | iShares Broad USD High Yield Corp Bd | 380 | D | 0.2 |
| HYDW | Xtrackers Low Beta High Yield Bond | 417 | C | 0.1 |
| GHYG | iShares Global High Yield Corp Bd | 494 | C | 0.2 |
| SJNK | SPDR Blmbg BarclaysST HY Bd | 524 | A | 3.7 |
| HYDB | iShares Edge High Yield Defensive Bd | 539 | D | 0.01 |
| JNK | SPDR Blmbg Barclays High Yield Bd | 552 | A | 9.4 |
| HYG | iShares iBoxx $ High Yield Corporate Bond | 556 | A+ | 14.8 |
| GHYB | Goldman Sachs Access Hi Yld Corp Bd | 569 | D | 0.01 |
| ANGL | VanEck Vectors Fallen Angel HiYld Bd | 569 | B | 1.2 |
| HYUP | Xtrackers High Beta High Yield Bond | 580 | C | 0.1 |
| PGHY | PowerShares Global ShrtTerm HiYld Bd | 593 | C | 0.2 |
| IHY | VanEck Vectors Intl Hi Yld Bd | 656 | C | 0.2 |
| JPHY | JPMorgan Disciplined High Yield | 656 | C | 0.1 |
| HYLV | IQ S&P High Yield Low Volatility Bd | 659 | C | 0.1 |
| HYXU | iShares International High Yield Bd | 660 | C | 0.1 |
*Best ETFs Honor Roll Member
1 Cumulative cost of holding a $10,000 position for a decade. Incorporates annual expense ratio, bid/ask spreads and cost offset from securities lending. 2Reflects bid/ask spreads and trading volume. A = easy to trade.
Data sources: Morningstar, Bloomberg, fund distributors.
