Though equity markets may have started out 2013 with a bang as the Dow and S&P both hit multi-year highs, the fixed income space remains rather uncertain. With interest rates expected to stay at near-zero levels for the foreseeable future, investors have found it challenging to find meaningful yields. This task, however, is certainly not impossible as there are dozens of exchange-traded products that offer the potential for some big payouts [see 101 High Yielding ETFs For Every Dividend Investor].
High yield corporate bond ETFs have recently caught the attention of many investors, as this niche market has proven to dish out some juicy yields. A closer look under the hood of these funds, however, reveals some factors investors should be mindful of.
Like a game of poker, investors are always asking themselves “is the risk worth the reward?”. The issue is no different for the high-yield space, as these products are typically more volatile than traditional investment-grade bond funds. While the ETFs that focus on the safer portion of the quality spectrum can certainly deliver meaningful yields, lower-rated corporate bond funds are currently boasting 30-day SEC yields upwards of 5.3%. As always, however, there is a catch; when looking at high yield corporate bond ETFs’ volatility figures, it is obvious that investors will have to stomach a good amount of risk [see 10 Questions About ETFs You've Been Too Afraid To Ask].
The chart below highlights five of the most popular high yield corporate bond ETFs, comparing the volatility, yield and expense ratios to the investment-grade benchmark LQD:
- iBoxx $ High Yield Corporate Bond Fund (HYG, A)
- Emerging Markets High Yield Bond Fund (EMHY, B-)
- Global ex USD High Yield Corporate Bond Fund (HYXU, B+)
- Senior Loan Portfolio (BKLN, B+)
- B-Ca Rated Corporate Bond Fund (QLTC, C+)
- iBoxx $ Investment Grade Corporate Bond Fund (LQD, A)
Though it is not at all surprising to see lower-quality bond funds exhibiting higher levels of volatility, it is important to note that certain ETFs (namely HYG and EMHY) have manged to produce impressive yields at relatively low levels of volatility. As such, yield-hungry investors looking to delve into the corporate bond space should take a close look at all of the options to find the perfect balance between risk and reward.
Disclosure: No positions at time of writing.