3 High-Yield Bond ETFs to Buy for Income in a Low-Rate Environment


  • These high yield bond ETFs offer strong income in any interest rate environment.
  • VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC): Emerging markets will benefit, and so will this ETF, as the U.S. Dollar weakens.
  • SPDR Blackstone Senior Loan ETF (SRLN): Senior loans offer a different sort of exposure to high fixed income assets.
  • iShares iBoxx $ High Yield Corporate Bond ETF (HYG): High yield corporate bonds offer superior income potential.
high yield bond etfs - 3 High-Yield Bond ETFs to Buy for Income in a Low-Rate Environment

Source: SWKStock / Shutterstock

It’s a new era out there for fixed income investors. After years of suffering through a prolonged low rate environment, interest rates have risen to more historically typical levels. This has had exciting effects for high yield bond ETFs and more traditional bond funds alike.

However, there’s the possibility that interest rates may not stay elevated that long. Inflation rates seem to be coming back down a bit, and many investors are worried about a potential recession. If a recession were to occur, it’d be likely that the Federal Reserve would go back to cutting interest rates. This, in turn, would lead to lower yields on many bond funds.

The good news, however, is that there are types of high yield bond funds that offer respectable yields in any interest rate environment. These three higher yielding bond ETFs, in particular, hold fixed income securities that can give off reliable and strong income streams regardless of the near-term direction in interest rates.

VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC)

Rolls of currency from many different countries. Foreign currency.
Source: Wara1982 / Shutterstock

Recently, there’s been a great deal of discussion about a potential decline in the value of the U.S. Dollar. In particular, various BRICS countries such as Brazil and China have been working to establish trade relationships that de-emphasize the dollar in international commerce.

In addition, the rash of banking failures in the United States has caused concerns around the financial system. After many years of undisputed financial and stock market dominance by the United States, there is now increasing interest in diversifying into foreign assets.

Enter the VanEck J.P. Morgan EM Local Currency Bond ETF (NYSEARCA:EMLC) which offers a diversified portfolio of emerging market bonds. Not only does it do that, but it holds the bonds in local money rather than hedging out the dollar exposure.

In the event that the dollar slides in value, this ETF would win on two fronts. One, it collects higher interest rates from foreign countries as compared to the United States’ bonds. Two, it would benefit from the appreciation in the value of those foreign currencies as well. For investors that want to grab some exposure outside of U.S. dollars, EMLC is worth a look. The ETF currently yields 5.6%.

SPDR Blackstone Senior Loan ETF (SRLN)

Picture of a loan agreement with a pen.
Source: William Potter / Shutterstock

The SPDR Blackstone Senior Loan ETF (NYSEARCA:SRLN) is a high yield fund focused on senior loans. A senior loan is above all the unsecured claims against a creditor and is equal to other first liens in the event of a bankruptcy.

In English, that means that if a firm goes bust, the senior loan holder has first dibs on the assets of the defaulted firm. This makes senior loans a great asset to hold in the event of a recession which causes adverse credit events to rise. While there are no guarantees, a senior loan fund should perform better in a downturn than most other types of corporate bond funds thanks to the seniority.

Historically, the senior loan market has been hard for average investors to access. However, the rise of senior loan ETFs such as this one have made an asset class once primarily reserved for institutional investors now available via an ordinary low-cost ETF. SRLN shares currently yield 6.3%.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Corporate Bonds
Source: Vitalii Vodolazskyi / Shutterstock.com

iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) is a high-yield corporate bond fund. These are often known proverbially as junk bonds, given their lower quality credit rating. However, historically these bonds have performed reasonably well, even in times of economic stress, giving investors more yield in return for the risk.

Any one individual high-yield corporate bond is likely to be quite risky. The magic of the HYG ETF, however, is its unparalleled level of diversification. As of this writing, the ETF currently holds a jaw-dropping 1,206 different corporate bonds within it.

By having such an array of holdings, this insulates HYG against a particular shock in any one sector or industry. And given the fact that the ETF only owns below investment-grade bonds, it tends to always carry a solid yield regardless of where interest rates are at any given time. HYG currently yields 5.5%.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2023/05/3-high-yield-bond-etfs-to-buy-for-income-in-a-low-rate-environment/.

©2023 InvestorPlace Media, LLC