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Top Four High Yield Bond ETFs

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Lingering economic conditions and still high unemployment rates are weighing on domestic equity markets. The market chaos is compelling investors to look for other investments beyond equities. At present, fixed-income markets, high yield bonds in particular, look attractive.

The global high yield bond ETF market has grown to a multi-billion dollar segment. While part of this reason is due to high yields and low default rates, outperformance on a broader perspective is also a key reason as well (Read: Seven Biggest Bond ETFs By Assets Under Management).

These trends have been especially important due to anemic stock returns and low yields from traditional investments. Broad equity indexes have remained flat, while ten year Treasury bonds remain depressed below 2%, well under their historical averages.

Furthermore, although default rates are expected to rise, many are looking for just a modest increase in defaults, but one that is still below the long-term average of 4%. Given this and the likelihood of low rates for the near future, it could be a very interesting time to make a play on the high yield bond ETF market.  

These bond ETFs also often cost investors less in fees than their mutual fund counterparts while also allowing for better control of tax issues. Additionally, the greater trading flexibility and transparency of the ETF structure helps to give investors a better picture of the investing landscape and could cut down on risk and volatility when compared to single issues of high yield bonds (read: Three Impressive High Yield Junk Bond ETFs).

While there are a number of options in this segment, we have taken a closer look at four of our favorite domestic high yield bond ETFs below. In a low rate environment, these funds could provide investors with income potential and relatively stable returns while remaining low correlated assets. With these benefits in focus, any of the following funds could be interesting picks for investors seeking to make a play on this market corner at this time:

Peritus High Yield ETF (HYLD)

Investors seeking capital appreciation in addition to high yields may find AdvisorShares entrant in December 2010, an attractive play in the bond market. This is an actively managed fund that invests in a focused portfolio of high yield debt securities, which include senior and subordinated corporate debt obligations (such as bonds, debentures, notes and commercial paper) and loans.

Having total assets of $91.3 million in its portfolio, the product does not have any limitation on maturity and includes short-term, medium-term and long-term maturities. It also looks to avoid new issues of debt while it also has the ability to cycle into U.S. T-Bills when the high yield market is crumbling.

The fund represents the junk corporate bonds with the lower effective duration of roughly 3.32 years, higher average yield to maturity of 10.81% and higher average coupon rate of 9.85%. In terms of credit quality, HYLD focuses on low-investment grade bonds (B+ and lower) and holds about 37 securities.

The ETF is widely diversified across sectors. Healthcare bonds take the top position in the basket followed by transportation and oil & gas. (Read: Could The Small Cap Healthcare ETF Be A Great Pick?)

The product has shown a nice run-up in its prices this year, surging about 3.7% year-to-date. However, in the past one year period, the fund is flat from a capital gains perspective. Nevertheless, the fund charges fees of 1.35% per year, which looks expensive, and has a higher turnover ratio of 81% on average.

SPDR Barclays Capital High Yield Bond ETF (JNK)

For another option in the high yield bond ETF space, investors have the ultra-popular JNK, initiated in November 2007. With assets of $11.1 billion under its management, the fund tracks the overall performance of the Barclays Capital High Yield Very Liquid Index, which includes fixed-rate, taxable, low rated corporate bonds usually ‘BBB’ and below.

With lower fees of 40 bps per year, the fund is heavily exposed to the industrial sector and holds around 228 bonds in its basket. The product has an average duration of 4.56 years and average yield to maturity of 7.87%. (Read: iShares Debuts Two High Yield Bond ETFs)

JNK provides an attractive dividend yield of 6.35%, much like other high yield junk bond ETFs. It has generated annual returns of 3.9% in the last one-year period from a capital gains look.

iBoxx $ High Yield Corporate Bond Fund (HYG)

The fund, issued by iShares in April 2007, seeks to match the performance of the iBoxx $ Liquid High Yield Index, before fees and expenses. The product holds 601 junk bonds with heavy focus on short and intermediate term corporates.

With an effective duration of 4.28 years and average yield to maturity of 7.14%, the product has an attractive coupon rate of 7.95%. In terms of credit quality, it focuses on lower grade bonds that have ratings of ‘BBB’ and lower.

Consumer service, financials, and oil & gas constitute the large part of the fund’s assets with Blackrock notes on top, followed by Sprint Nextel’s notes due in 2018 and Citigroup notes due in 2017. (See more ETFs in the Zacks ETF Center)

This ETF with AUM of $14.6 billion is cheap, charging only 50 bps a year in fees. HYG delivers a huge dividend of 5.53% per annum and excellent annual returns of 5.5% over the past one year period.  

PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB)

This ETF seeks to replicate the price and yield of the RAFI High Yield Bond Index, holding 220 securities. The fund holds U.S. bonds registered for sale in the U.S. that have at least one year until maturity and focus on B to BBB rated bonds.

Unlike other products in the space, this ETF weights securities by a combination of fundamental factors (Read: Are the Fundamental Bond ETFs Better Fixed Income Picks?). With total assets of $937.6 million, the fund has a low effective duration of 3.98 years and targets only mid-term corporate bonds. The average yield to maturity and average coupon rate is 5.60% and 7.51%, respectively.

Consumer discretionary constitutes the top spot in the basket, followed by energy and financials. The product is light on utilities and information technology (Read: Utility ETFs: Slumping Sector in Rebounding Market). PHB yields 5.46% per annum and delivered an impressive 5.7% annual return over the last year. It also looks cheap as it charges only 50 bps in fees a year, which isn’t the lowest but is at a very respectable level.

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