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High-Yield ETFs for a Low-Rate Market


Treasury yields are still low despite the August rebound and equities are digesting their recent gains, leaving investors still yearning for asset classes that generate additional income. For example, high-yield corporate bond exchange traded funds have gotten their fair share of attention during these uncertain times.

While equity markets are trying to work out of this economic hangover, you can get paid very handsomely in the high-yield market. What you’re paid today in high yields, compared to Treasuries, is very rewarding. [Are High-Yield ETFs Right for You?]

For instance the iShares iBoxx $ High Yield Corporate Bond (HYG) yields 7.04%, SPDR Barclays Capital High Yield Bond (JNK) yields 7.13%, PowerShares Fundamental High Yield Corp Bond (PHB) yields 5.27% PIMCO 0-5 Year US High Yield Corporate Bond Index Fund (HYS) yields 5.66%.

In comparison, the yields on the benchmark 10-year Treasury notes have dipped to 1.4% in July before recovering to about 1.8%.

It’s a different world than it was in 2008, when high-yield bonds got creamed by the financial crisis. We haven’t seen as much volatility in high yield as we have in equities. Additionally, corporations have cleaned up their balance sheets since the financial crisis and refinanced at the current low rates.

Investors have funneled over $6.2 billion in new assets into high-yield bond ETFs in the first half of the year, reports Jason Kephart for InvestmentNews. Meanwhile, high-yield-bond mutual funds attracted $16 billion in assets over the same period.

However, Timothy Strauts, an ETF analyst at Morningstar, warns that ETFs are only as liquid as their underlying holdings and the high-yield bond market is quite illiquid. Consequently, during times of high volatility, the ETFs may see wider premiums and discounts. [Are ETFs Making the High-Yield Bond Market More Volatile?]

For more information on high-yield fixed-income assets, visit our high-yield bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.