Junk Bond ETFs
The stock market is no stranger to volatility, which is seen in the daily price movement of stocks. And when decisions are made due to the volatility of the markets, the choices usually aren’t good ones. Luckily, a method to invest without worrying about daily volatility exists: investing in the bond market.
The bond market is actually more than double the size of the U.S. stock market and is a great source of income. And one of the better ways to get exposure to the bond market is by owning an exchange-traded fund (ETF).
For income investors, consider owning high-yield junk bond ETFs. These generate a high yield and provide the benefits of both the bond market and ETFs. Read on for more details, including a list of junk ETFs traded in the U.S.
What Is a Junk Bond ETF?
A junk bond ETF is an ETF that holds many different junk bonds, be they based in the U.S. markets or have holdings around the world. The holdings within the ETF will depend on the benchmark index that is used to either form the ETF or make a comparison to past returns.
A junk bond is offered by a company or government entity with a high yield and comes in the form of an interest payment, normally paid out twice a year. Simply put, it is a loan made by investors to the entity in question. In return, interest income is received and the principal is returned to the investor on the maturity date.
The reason for a high yield is that junk bonds are labelled as being a non-investment-grade bond. This is based on an individual junk bond’s credit rating of Ba1/BB+ or lower.
A credit rating is enforced on all bonds before they are available for purchase on the markets. The rating is based on the likelihood of the borrower (company/government entity) paying back the principal and interest payments, its future business outlook, and the strength of its financial statements. The credit rating are set by Moody’s Corporation (NYSE:MCO), Standard & Poor’s, and Fitch Group Inc.
Characteristics of Junk Bond ETFs
All Junk Bond ETFs have similar characteristics, listed and explained below.
1. More Liquid Than Buying a Bond
Some bonds do not trade very often, which could impact you in a negative manner. A bond, on an individual basis, trades a bit differently than a stock does, and it is not easy at times. If you planned on purchasing a position in a high-yield bond, it may be difficult to buy or sell it at your desired price due to the liquidity of the junk bond.
With a junk bond ETF, this concern disappears, since it trades more like a stock. It is also easier to get in and out of the position at a more favorable price.
2. Diversification
A big advantage of owning a junk bond ETF is that it provides you with many different high-yielding bonds. In fact, there are times where a single ETF contains more than 100 different bonds. This not only adds to the overall diversification, but also saves you time because multiple transactions do not have to be placed in order to have exposure to the segment.
Also, (non-investment-grade) junk bonds have a higher default risk compared to investment-grade bonds, which have a higher credit rating. But by owning a diversified ETF, the default risk is much lower. Since there are potentially hundreds of different junk bonds held, one position would not really affect the income or trading price that much. This is where some research is required to ensure one position within the ETF does not represent a very large amount of capital invested.
3. Investment Exposure
A great benefit of investing in a junk bond ETF is that you get access to investments that otherwise would remain unknown or ignored. For instance, let’s say you wanted to purchase a bond in Japan and another in Germany. These countries’ markets have different rules, regulations, and currencies, so it could become very overwhelming to so much as start the process of purchasing a bond. The different time zones could be another issue.
With an ETF, all these questions do not have to be answered. Rather, the holdings need to be looked at to ensure that the countries that you want exposure to are represented in the holdings.
4. Professional Management
All the investment decisions are made by portfolio managers, who are responsible for all the assets within the ETF. There is usually a benchmark that is used either to track the performance of the ETF or to duplicate the holdings. There may also be times where more than one investment strategy is used within a single ETF in order to take advantages of current market conditions and generate a higher return than the benchmark index.
5. Record Keeping
Filling out your taxes can feel very frustrating and overwhelming, given all the necessary calculations and paperwork. But when you own a junk bond ETF, the management team takes care of all the math. All the completed information is normally sent to the holder of the ETF, saving time.
Below is a list of all the junk bonds ETFs that trade on the U.S. markets.
List of Junk ETFs Traded in the U.S.
| Ticker | ETF Name | Issuer | Type of Bonds Held |
| UJB | ProShares Ultra High Yield | ProShares | Leveraged: U.S. – Corporate High Yield |
| SJB | ProShares Short High Yield | ProShares | Inverse: U.S. – Corporate High Yield |
| HYDD | Direxion Daily High Yield Bear 2X Shares | Direxion | Inverse: U.S. – Corporate High Yield |
| WYDE | ProShares CDS Short North American HY Credit ETF | ProShares | Inverse:North America – Corporate High Yield |
| SHYD | VanEck Vectors Short High-Yield Municipal Index ETF | VanEck | U.S. – Municipals High Yield Intermediate |
| BSJH | Guggenheim Bulletshares 2017 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Ultra-Short Term |
| SJNK | SPDR Bloomberg Barclays Short Term High Yield Bond ETF | State Street Global Advisors | U.S. – Corporate High Yield Short-Term |
| SHYG | iShares 0-5 Year High Yield Corporate Bond ETF | BlackRock | U.S. – Corporate High Yield Short-Term |
| HYS | PIMCO 0-5 Year High Yield Corporate Bond Index ETF | PIMCO | U.S. – Corporate High Yield Short-Term |
| BSJI | Guggenheim BulletShares 2018 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Short-Term |
| BSJJ | Guggenheim BulletShares 2019 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Short-Term |
| HYZD | WisdomTree Interest Rate Hedged High Yield Bond Fund | WisdomTree | U.S. – Corporate High Yield Short-Term |
| HYND | WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund | WisdomTree | U.S. – Corporate High Yield Short-Term |
| SFHY | WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond | WisdomTree | U.S. – Corporate High Yield Short-Term |
| BSJK | Guggenheim BulletShares 2020 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Intermediate |
| BSJL | Guggenheim BulletShares 2021 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Intermediate |
| BSJM | Guggenheim BulletShares 2022 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Intermediate |
| BSJN | Guggenheim BulletShares 2023 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Intermediate |
| BSJO | Guggenheim BulletShares 2024 High Yield Corporate Bond ETF | Guggenheim | U.S. – Corporate High Yield Intermediate |
| BKLN | PowerShares Senior Loan Portfolio | Invesco PowerShares | U.S. – Corporate High Yield Floating Rate |
| SNLN | Highland iBoxx Senior Loan ETF | Highland Capital Management | U.S. – Corporate High Yield Floating Rate |
| FLRT | AdvisorShares Pacific Asset Enhanced Floating Rate ETF | AdvisorShares | U.S. – Corporate High Yield Floating Rate |
| PGHY | PowerShares Global Short Term High Yield Bond Portfolio | Invesco PowerShares | U.S. – Broad Market High Yield Short-Term |
| HYD | VanEck Vectors High-Yield Municipal Index ETF | VanEck | U.S. – Municipals High Yield |
| HYMB | SPDR Nuveen S&P High Yield Municipal Bond ETF | State Street Global Advisors | U.S. – Municipals High Yield |
| HYG | iShares iBoxx $ High Yield Corporate Bond ETF | BlackRock | U.S. – Corporate High Yield |
| JNK | SPDR Bloomberg Barclays High Yield Bond ETF | State Street Global Advisors | U.S. – Corporate High Yield |
| PHB | Powershares Fundamental High Yield Corporate Bond Portfolio | Invesco PowerShares | U.S. – Corporate High Yield |
| ANGL | VanEck Vectors Fallen Angel High Yield Bond ETF | VanEck | U.S. – Corporate High Yield |
| HYGH | iShares Interest Rate Hedged High Yield Bond ETF | BlackRock | U.S. – Corporate High Yield |
| HYLB | Deutsche X-trackers USD High Yield Corporate Bond ETF | Deutsche Bank | U.S. – Corporate High Yield |
| HYLD | AdvisorShares Peritus High Yield ETF | AdvisorShares | U.S. – Corporate High Yield |
| HYHG | ProShares High Yield-Interest Rate Hedged ETF | ProShares | U.S. – Corporate High Yield |
| HYLV | IQ S&P High Yield Low Volatility Bond ETF | IndexIQ | U.S. – Corporate High Yield |
| JPHY | JPMorgan Disciplined High Yield ETF | JPMorgan | U.S. – Corporate High Yield |
| FALN | iShares Fallen Angels USD Bond ETF | BlackRock | U.S. – Corporate High Yield |
| HYIH | Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF | Deutsche Bank | U.S. – Corporate High Yield |
| HYXE | iShares iBoxx $ High Yield ex Oil & Gas Corporate Bond ETF | BlackRock | U.S. – Corporate High Yield |
| WFHY | WisdomTree Fundamental U.S. High Yield Corporate Bond Fund | WisdomTree | U.S. – Corporate High Yield |
| THHY | VanEck Vectors Treasury-Hedged High Yield Bond ETF | VanEck | U.S. – Corporate High Yield |
| IHY | VanEck Vectors International High Yield Bond ETF | VanEck | Global Ex-U.S. – Corporate High Yield |
| SOVB | Cambria Sovereign Bond ETF | Cambria | Global – Sovereign High Yield |
| SRLN | SPDR Blackstone / GSO Senior Loan ETF | State Street Global Advisors | Global – Corporate High Yield Floating Rate |
| FTSL | First Trust Senior Loan Fund | First Trust | Global – Corporate High Yield Floating Rate |
| HYLS | First Trust Tactical High Yield ETF | First Trust | Global – Broad Market High Yield |
| HYEM | VanEck Vectors Emerging Markets High Yield Bond ETF | VanEck | Emerging Markets – Corporate High Yield |
| EMHY | iShares Emerging Markets High Yield Bond ETF | BlackRock | Emerging Markets – Broad Market High Yield |
| HYXU | iShares International High Yield Bond ETF | BlackRock | Developed Markets Ex-U.S. – Corporate High Yield |
| HHYX | iShares Currency Hedged International High Yield Bond ETF | BlackRock | Developed Markets Ex-U.S. – Corporate High Yield |
| GHYG | iShares Global High Yield Corporate Bond ETF | BlackRock | Developed Markets – Corporate High Yield |
Type of Junk Bond Investments
As you can tell by the chart, there are many different types of junk bond ETFs available, many of which track or replicate a benchmark index. At times, the underlying holdings of the index will represent the majority of the ETF and a smaller portion of capital will be based on the portfolio managers’ decisions.
Below, the type of bonds held are explained. This should ensure that you are owning the type junk bond ETF that you initially planned to.
Leveraged: U.S. Corporate Bonds
These are funds that borrow money based on the assets of the ETF, with the expectation of a return greater than the index that is being used as a benchmark. This strategy only uses U.S. corporate high-yield bonds.
For example, let’s say the underlying benchmark returned one percent on a given day. Therefore, the leveraged junk bond ETF would return two or three percent. The return would be based on how leveraged the ETF is; the more leveraged, the higher the return.
This may sound like an appealing investment opportunity. However, if the benchmark index saw a negative return, it would mean a greater loss when compared to the benchmark index.
Inverse: U.S. – Corporate High Yield
If you want to own an inverse high-yield ETF, it would mean that you have a negative view on the high-yield bond market. If that market saw a negative return, then the ETF will enjoy a positive one. The focus here is on U.S. corporate bonds. If the high-yield bond market generated a positive return, it would mean a negative return from the ETF–hence the name “inverse ETF.”
Inverse: North America – Corporate High Yield
This is the same as above, except the holdings, are high-yield bonds from across all three North American countries.
U.S. – Municipals High Yield Intermediate
This is an ETF that is made of denominated, high-yield, short-term, tax-exempt bonds only traded in the U.S. Greenback. Short-term means that the maturities of the bonds are, as the name implies, short—typically less than three years. Investors are rewarded by being exempt from paying tax on the income. These bonds are issued by government entities around the country and are backed by the credit rating of the issuing government. The funds are used for buildings, schools, highways, and sewer systems.
U.S. – Corporate High Yield Ultra-Short Term
The focus of these ETFs is owning high-yield U.S. corporate bonds that have only one to three years until the maturity date.
U.S. – Corporate High Yield Short-Term/Intermediate
This type of ETF is similar to the one above, except the maturity dates are a bit longer, at two to five years.
U.S. – Corporate High Yield Floating Rate
These ETFs hold non-investment-grade bonds that see the interest rate and income go higher the longer the bond is outstanding. It involves companies that had no choice but to take what the market offered them in order to raise capital. These ETFs only hold U.S. high-yielding corporate bonds.
U.S. – Broad Market High Yield Short-Term
This group of ETFs hold high-yielding bonds that are based on the U.S. Greenback. The companies within are based in the U.S. and trade on foreign markets. The maturities must be three years or less.
U.S. – Corporate High Yield
These ETFs only hold high-yielding U.S.-dollar-denominated bonds. The maturities of the bonds differ in length, but there is a bias towards long-term maturities.
Global Ex-U.S. – Corporate High Yield
This group of ETFs holds high-yielding bonds that are issued around that world and based outside the U.S. It also avoids U.S.-currency-based investments. Therefore, the return from this type of ETF is based both on the performance of junk bonds held and the currency in question. There is a return based on the currency because the ETF trades on the U.S. market and would be purchased in the U.S. dollar.
Global – Sovereign High Yield
A ETF under this category represents holdings in national governments around the world. Governments that issue these bonds have the choice of doing so in either their own currency or a foreign one. Investors believe that the government will pay back the agreed-to principal and interest payments.
Global – Corporate High Yield Floating Rate
High-yield junk bonds held under these ETFs have the potential for a higher interest rate and income as time passes. The junk bonds are from corporations around the world.
Global – Broad Market High Yield
This would be similar to the global ex-U.S. corporate high yield type mentioned above. The only difference is that all type of bonds from various countries are held.
Emerging Markets – Corporate High Yield
Emerging markets-corporate high yield ETFs represent an ownership in bonds that trade around the world and are based in the U.S. dollar. Therefore, the total return is according to the performance of the high-yield bonds held within.
Emerging Markets – Broad Market High Yield
This group of ETFs are very similar to emerging markets-corporate high-yield ones, except there is currency risk involved. This is due to the bonds not being based on the Greenback.
Developed Markets Ex-U.S. – Corporate High Yield
Holdings within this group of ETFs come from outside of the U.S. Only high-yield bonds from economically developed countries and markets are held within.
Developed Markets – Corporate High Yield
This group of bonds is the same as developed markets ex-U.S.- corporate high-yield ETFs, with the one difference being that they hold U.S. junk bonds in American currency.
Final Thoughts on Junk Bond ETFs
It is not always best to chase the highest-yield investments. This is especially true when it comes to junk bond ETFs, since they all have different types of holdings within them. It is also very important to look at the investment strategy of the ETF to ensure it is suitable for your investment goals, risk tolerance, and level of experience. For instance, if you want exposure to a junk bond ETF and do not want to take any currency risk, then it may be best to ignore ETFs with holdings in different regions.
Simply by taking the time to understand what you want in your investment portfolio and researching different investments, you could add greatly to your bottom line. So dig a bit deeper into potential junk bond ETF investment opportunities before deploying any capital.