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High yield bond ETFs can work well for investors who don’t mind taking risks in exchange for higher yields and higher potential returns in the long run. Before buying shares of these unique fixed income securities, learn how they work and the pros and cons of investing in them. 

What Is a High Yield Bond ETF? 

A high yield bond ETF, also known as a junk bond ETF, is an exchange-traded fund that invests in a portfolio of high yield or noninvestment-grade bonds. These bonds are issued by companies with a lower credit rating and are considered riskier than investment-grade bonds. 

High yield bond ETFs typically track the performance of a high yield bond index, which consists of a diversified mix of noninvestment grade bonds, often from companies in industries such as energy, telecommunications and healthcare. These ETFs may also invest in other fixed income securities, such as senior loans or convertible bonds.  

The term "junk bond" refers to the fact that these bonds have a higher risk of default compared to investment-grade bonds. As a result, they generally offer a higher yield to compensate investors for the additional risk. 

Investing in high yield bond ETFs can offer the potential for higher returns compared to investment-grade bond ETFs, but it also comes with higher risk. High yield bond ETFs can be more volatile and may experience significant price fluctuations due to changes in interest rates, credit ratings and other factors. 

List of Top High Yield Bond ETFs by AUM 

Here are some of the top high yield bond ETFs based on assets under management as of May 11, 2023:

1. iShares iBoxx $ High Yield Corporate Bond ETF (HYG): This is the largest high yield bond ETF, with over $14 billion in assets under management. It tracks the performance of the Markit iBoxx USD Liquid High Yield Index, which includes noninvestment grade corporate bonds denominated in U.S. dollars.  $iShares iBoxx $ High Yield Corporate Bond ETF(HYG)$

2. iShares Broad USD High Yield Corporate Bond ETF (USHY): This high yield bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds with broad maturities.  $iShares Broad USD High Yield Corporate Bond ETF(USHY)$

3. SPDR Bloomberg High Yield Bond ETF (JNK): This high yield bond ETF tracks the performance of the Bloomberg Barclays High Yield Very Liquid Index, which includes U.S. dollar-denominated noninvestment-grade corporate bonds.  $SPDR Bloomberg High Yield Bond ETF(JNK)$

4. iShares 0-5 Year High Yield Corporate Bond ETF (SHYG): This high yield bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years.  $iShares 0-5 Year High Yield Corporate Bond ETF(SHYG)$

5. SPDR Blackstone Senior Loan ETF (SRLN): This high yield bond ETF provides actively managed exposure to noninvestment-grade, floating-rate senior secured debt of U.S. and non-U.S. corporate debt that resets in three months or less.  $SPDR Blackstone/GSO Senior Loan ETF(SRLN)$

Pros and Cons of Investing in High Yield Bond ETFs 

High yield bond ETFs offer several benefits, such as higher yields and the potential for higher returns, but there are also potential risks, such as interest rate risk and credit risk that investors should know about.  

The main pros and cons of investing in high yield bond ETFs are: 

Pros of High Yield Bond ETFs 

• Higher Yield Potential: High yield bond ETFs typically offer higher yields than investment-grade bond ETFs, which can provide investors with a source of higher income. 

• Diversification: High yield bond ETFs invest in a diversified basket of bonds issued by different companies across various sectors, which can help to spread out risk and reduce the impact of any single bond defaulting. 

• Accessible: High yield bond ETFs are available to investors through their brokerage account, making it easy to invest in a diversified basket of high yield bonds without having to purchase individual bonds. 

• Lower Fees: High yield bond ETFs tend to have lower fees than actively managed high yield bond mutual funds, which can help to improve returns over the long term. 

Cons of High Yield Bond ETFs 

• Higher Risk: High yield bonds are considered riskier than investment-grade bonds because they are issued by companies with lower credit ratings and may be more likely to default. 

• Interest Rate Risk: High yield bond ETFs are sensitive to changes in interest rates, which can impact the value of the bonds held in the ETF. 

• Liquidity Risk: Some high yield bonds may be less liquid than investment-grade bonds, which can make it more difficult to sell them during times of market stress. 

• Market Risk: High yield bond ETFs are subject to market risk, which means that their value can fluctuate based on factors such as changes in economic conditions, investor sentiment and geopolitical events. 

How Are High Yield Bond ETFs Taxed? 

High yield bond ETFs are taxed in the same way as other bond ETFs and are subject to federal income tax and, in some cases, state and local taxes. Some high yield municipal bond ETFs pay interest that is free from federal income tax. However, some municipal bond ETFs may hold bonds that are subject to the alternative minimum tax. 

• Income tax: The income generated by high yield bond ETFs is typically in the form of interest payments, which is taxable at the ordinary income tax rate. The ETF will distribute the interest income to shareholders on a regular basis, and shareholders will need to report this income on their tax return. 

• Capital gains tax: If a shareholder sells their shares in a high yield bond ETF for a profit, they will be subject to capital gains tax on the difference between the sale price and the original purchase price. The tax rate on capital gains depends on how long the investor held the shares before selling them. If the shares were held for one year or less, the gains will be taxed at the short-term capital gains tax rate, which is the same as the ordinary income tax rate. If the shares were held for more than one year, the gains will be taxed at the long-term capital gains tax rate, which is typically lower than the ordinary income tax rate. 

• Municipal bond taxation: Some high yield bond ETFs track an index of high yield municipal bonds, and the interest from these bonds are generally exempt from federal income tax. However, some muni ETFs may invest in bonds that are subject to the alternative minimum tax (AMT). Investors may need to pay the AMT if their income is high enough, which could impact the tax-exempt status of the income generated by the ETF. 

Bottom Line 

High yield bond ETFs offer investors some potential benefits, such as higher yields and higher returns than traditional bond ETFs. However, these benefits can come with various forms of market risk that investors should understand before buying shares of these unique fixed income securities.