Balanced Portfolios Hold Onto High-Yield Exposure

It may seem like a savvy and defensive move to skip out on high-yield exposure. However, doing so means investors are missing out on significant yield.

“I think what’s really interesting right now is this extreme aversion to high yield that we’ve seen in clients for the last year,” Jason Bloom, Invesco’s head of fixed income and alternatives ETF Product Strategy, told VettaFi. “It’s been a natural reaction to this repetitive narrative that the economy is on the cusp of recession.”

If there is a recession, high-yield issuers are generally going to be among the first to go. Additionally, high-yield issuers are positioned to be further stressed due to the ballooning maturity wall. High-yield issuers may have a hard time rolling debt in the coming years. It’s expected they will need to take on much higher interest rates.

“Defaults are likely to tick higher, spreads are likely to widen,” Bloom said.

However, investors have made a big bet by pulling away from high yield, Bloom said. In the current environment, where investors should focus on staying diversified and avoid making any big bets, completely abandoning high yield runs counter to that idea of staying balanced.

The Invesco Fundamental High Yield Corporate Bond ETF (PHB B) could be a solution for investors wary of taking on too much risk from high-yield exposure. The fund offers some high-yield exposure but is a bit more conservative and avoids riskier credits.

“PHB, which is fundamentally screened high yield, is essentially going to give you a higher quality slice of the high yield bond market,” Bloom said.

PHB could be the perfect fit for investors looking to venture into high yield, Bloom said. They’re embracing the idea that the U.S. economy is not in for a severe recession. However, they still want to be a little more conservative as opposed to taking pure beta exposure to high yield.

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