This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Six Styles of High Yield Bond ETFs

By:

CFA, Head of U.S. iShares Fixed Income Strategy

Three takeaways

  • Ultra-low interest rates make it difficult for investors to earn yields in excess of inflation
  • High yield bonds can be a source of income in today’s market
  • iShares has numerous bond ETFs that can help investors target different segments of the high yield bond market, depending on their needs and preferences

The past year was marked by many extraordinary events in the financial markets.

Coronavirus worries injected sudden market volatility into global financial markets and prompted the most jarring asset price swings since the great financial crisis. In response, lobal central banks engaged in a variety of actions to provide stimulus to the economy to soften the impact of COVID-19, including the Federal Reserve reducing its policy interest rate to near zero to lower the cost of credit and improve liquidity for borrowers.

For savers, a low-rate environment means it is increasingly difficult to generate returns on bonds that overcome inflation. Consider that the consumer price index is 1.2% year-over-year, but the Fed funds target rate is 0-0.25% — down from 2.25-2.50% as recently as July 2019.1

The BlackRock Investment Institute (BII) recently endorsed high yield bonds in 2021 for income-seeking investors. Higher-yielding bonds can help investors reach their fixed income goals, and this article walks through many of the questions I get often about how yield bond exchange traded funds (ETFs) can fit into income-seeking portfolios.

Where’s the yield?

fixed income yield 2020

Source: US Federal Reserve, ICE and BlackRock as of 11/30/2020. Fed Fund Target Rate represented by the upper bound of the range, U.S. Treasuries represented by ICE U.S. Treasury Core Bond Index, Core Bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Investment Grade (IG) Corporates represented by the ICE BofAML U.S. Corporate Master Index, High Yield Corporate represented by the ICE BofAML U.S. High Yield Constrained Index

Role of fixed income in a portfolio

For starters, there are three primary roles that bond ETFs can play in a portfolio.

  • Income: Bonds can be used for income, which in today’s market can help investors add credit risk to boost yield. Corporate bonds generally pay a yield above government bonds. The extra yield premium varies based on a corporate issuer’s credit risk, time to maturity and overall market conditions.
  • Capital preservation: Bond prices tend to not fluctuate as much as stock prices and lower duration bonds can help preserve investors’ savings. If you are more concerned about return-of-capital rather than return-on-capital, then it’s best to stick to bonds with shorter maturities.
  • Equity market diversification: Government bonds and investment grade securities tend to benefit from a flight-to-quality when the stock market declines. While these bonds yield less than below investment grade bonds, they have low correlations to the stock markets and can help balance out overall portfolio returns over time.

Investors generally need to balance out these competing roles in the portfolio to meet goals, since no single bond or bond fund can meet all these objectives. More fixed income-heavy portfolios (less than 30% stocks) will need more income to meet return objectives, while more stock-heavy portfolios (70-80% stocks) should have higher quality bonds to diversify equities. The world of ultra-low rates means that all types of investor are increasingly reliant on income to generate total return.

Different ways to invest in high yield bond markets

The first-ever high yield bond ETF, iShares iBoxx $ Liquid High Yield Bond ETF (HYG), was launched in 2007 a liquid way to track the high yield market. Ten years later, iShares Broad USD High Yield Bond ETF (USHY) launched to track an even broader high yield index. Today investors have choice with 17 iShares high yield bond ETFs that are designed to create customized income portfolios.

Each of the iShares high yield bond ETF is a bit different, and below are some of the approaches they take to help investors reach their goals:

Income with capital preservation: iShares 0-5 Year Corporate Bond ETF (SHYG) tracks an index tied to the shorter-maturity part of the market. Additionally, its index will remove bonds when they fall below $60, which a widely considered metric of distress. Removing these types of bonds can potentially reduce losses during a credit cycle.

Higher-quality high yield: iShares BB Rated Corporate Bond ETF (HYBB) invests in the BB-rated high yield corporate bond market, those just below the “investment grade” dividing line. This ETF will not have exposure to the lower rated bonds (B-rated and below) that are more likely to default.

Fallen angels: iShares Fallen Angels USD Bond ETF (FALN) offers exposure to fallen angels, bonds there are originally investment grade that get downgraded to high yield. Fallen angels tend to outperform the broad high yield market over time. These bonds also tend to get upgraded more often and have longer duration than the new issue high yield market.

Sustainable high yield: iShares ESG Advanced High Yield Corporate Bond ETF (HYXF) invests in high yield bonds from issuers with higher ESG ratings, while extensively screening out controversial industries. Sustainable bond ETFs incorporate sustainability-related considerations, which can provide more insights into fixed income solutions.

Term Maturity (iBonds): iShares iBonds ETFs are designed to mature like a bond, trade like a stock and are diversified like a fund. The High Yield & Income iBonds, with maturities from 2021 – 2026, invest in bonds that provide high income and mature in a specific calendar year. Visit the iBonds Ladder Tool to start building a high yield bond ladder.

Summing it up

The BlackRock Investment Institute expects interest rates to stay low for the foreseeable future as the global economy rebounds from the effects of the pandemic. This market environment complicates the options for yield-seeking investors. iShares ETFs offer myriad approaches for seeking income in an easy-to-trade, on-exchange format.

Originally Posted on December 22, 2020 – Six Styles of High Yield Bond ETFs

© 2020 BlackRock, Inc. All rights reserved.

1U.S. Bureau of Labor Statistics (as of Dec. 10, 2020); Federal Reserve Bank of New York (as of Dec. 8, 2020).

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Shares of ETFs trade at market price, which may be greater or less than net asset value. The iShares® iBonds® ETFs (“Funds”) will terminate within the month and year in each Fund’s name. An investment in the Fund(s) is not guaranteed, and an investor may experience losses and/or tax consequences, including near or at the termination date. In the final months of each Fund’s operation, its portfolio will transition to cash and cash-like instruments. As a result, its yield will tend to move toward prevailing money market rates, and may be lower than the yields of the bonds previously held by the Fund and lower than prevailing yields in the bond market.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.

An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash.

A fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. In addition, companies selected by the index provider may not exhibit positive or favorable ESG characteristics.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., BlackRock Index Services, LLC, Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), ICE Data Services, LLC, India Index Services & Products Limited, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.

Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Equity REITS Index, FTSE NAREIT All Residential Capped Index or FTSE NAREIT All Mortgage Capped Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index or FTSE EPRA/NAREIT Global REIT Index; all rights vest in FTSE, NAREIT and EPRA.“FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.

© 2020 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

iCRMH1220U/S-1449502

Disclosure: iShares by BlackRock

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Markit Indices Limited.

©2021 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from iShares by BlackRock and is being posted with permission from iShares by BlackRock. The views expressed in this material are solely those of the author and/or iShares by BlackRock and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top