Rebecca BaldridgeInvesting Writer
Rebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm.
Rebecca Baldridge
Rebecca BaldridgeInvesting Writer
Rebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm.
Investing Writer
Paul KatzeffDeputy Editor, Investing
Paul Katzeff is an award-winning journalist who has written four books about how to grow your 401(k) retirement nest egg and one about internet investing. Before becoming an investing deputy editor with Forbes Advisor, he was a senior reporter/writer at Investor's Business Daily, a correspondent for Money magazine, managing editor of the Boston Business Journal and staff writer for the Boston Herald American Sunday magazine. His work has been featured in The New York Times and The Wall Street Journal.
Reviewed
Paul Katzeff
Paul KatzeffDeputy Editor, Investing
Paul Katzeff is an award-winning journalist who has written four books about how to grow your 401(k) retirement nest egg and one about internet investing. Before becoming an investing deputy editor with Forbes Advisor, he was a senior reporter/writer at Investor's Business Daily, a correspondent for Money magazine, managing editor of the Boston Business Journal and staff writer for the Boston Herald American Sunday magazine. His work has been featured in The New York Times and The Wall Street Journal.
Deputy Editor, Investing
Reviewed
Updated: May 2, 2024, 8:54pm
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Fixed income is a core component of a well-diversified investment portfolio, and higher interest rates can make shorter-duration junk bonds particularly attractive for income investors. Higher rates can boost returns over time as fund managers reinvest cash from maturing issues at higher yields.
In choosing the best junk bond ETFs, Forbes Advisor has focused on higher-quality, shorter-duration junk bond funds. Given the current economic uncertainty, high-yield investors would be well advised to stay at the BB-end of the rating scale.
Why you can trust Forbes Advisor
Read more
Best Ofs
- Best General ETFs
- Best Dividend ETFs
- Best Bond ETFs
- Best Growth ETFs
- Best Bitcoin ETFs
- Best Brokerage Accounts
Show Summary
- iShares Fallen Angels USD Bond ETF (FALN)
- SPDR Bloomberg Short Term High Yield Bond ETF (SJNK)
- SPDR Portfolio High Yield Bond ETF (SPHY)
- iShares Inflation Hedged High Yield Bond ETF (HYGI)
- iShares Broad USD High Yield Corporate Bond ETF (USHY)
- iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)
- iShares US and International HY Corporate Bond ETF (GHYG)
- Methodology
SPDR Bloomberg Short Term High Yield Bond ETF (SJNK)
Expense Ratio
0.40%
Dividend Yield
7.50%
10-Year Avg. Annualized Return
3.59%
0.40%
7.50%
3.59%
Editor's Take
The SPDR Bloomberg Short-Term High Yield Bond ETF seeks to provide results that track the performance of the Bloomberg US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index.
The fund invests in fixed-rate, short-term, U.S.-dollar-denominated, high-yield corporate bonds with maturities of less than five years. Their sub-investment-grade ratings range between Caa3 and Ba1 by Moody’s and between CCC- and BB+ by S&P or Fitch.
SJNK’s under five-year maturity cap means the portfolio has lower interest-rate risk than ETFs composed of longer bonds. About 60% of holdings have maturities of three to five years. Approximately 25% have maturities of two to three years. That’s good at a time when the Federal Reserve is still raising rates to tame inflation.
In terms of duration, SJNK has an average effective duration of a little more than two years. That’s lower than its high-yield bond fund peer group’s average effective duration exceeding three years. Effective duration shows the expected price decline of a bond or bond fund for each 1% rise in interest rates. In SJNK’s case, shareholders can expect the security to fall in value by just 2.35% for each 1% rise in interest rates.
Credit quality presents higher risk in the current environment. Less than 2% of the portfolio has an investment-grade rating.
SPDR Portfolio High Yield Bond ETF (SPHY)
Expense Ratio
0.05%
Dividend Yield
7.81%
10-Year Avg. Ann. Return
4.04%
0.05%
7.81%
4.04%
Editor's Take
An outstanding dividend yield makes SPDR Portfolio High Yield Bond ETF the most generous income provider of the ETFs on our list. Meanwhile, SPHY’s bargain-basem*nt annual expense ratio makes it the least expensive entry on the list. Its annual fee is approximately one-eighteenth of its peer group’s average.
SPHY tracks the ICE BofA US High Yield Index of U.S. corporate debt, and more than 98% of its holdings are junk bonds. Its largest weighting is to the consumer discretionary sector. SPHY’s next largest sources of bonds are the communications, energy and consumer defensive sectors.
Around 49% of the fund’s bond holdings have maturities of one to five years. Another 46% have maturities of five to 10 years. The fund has an average effective duration of about 3.5 years.
In addition to measuring a bond or fund’s vulnerability to interest-rate increases, duration reflects the time it takes an investor to recover the true cost of a bond, including its coupons and any call features. At a time when rates are climbing, investors are worried about locking up their money for long periods. That’s why long bonds–let’s say bonds that mature in 10 years or longer–have lost so much value in the past year.
SPHY’s duration is a tad higher than its peer group, but still relatively short. That makes the fund fairly well-suited for the current rising interest-rate environment.
Methodology
To determine our top choices for the best junk bond ETFs, we screened the available universe of high-yield corporate bond funds using the following criteria:
- Funds with an overall credit rating of A- or better
- A credit rating of B or better for returns
- An expense ratio of less than 0.65%
An ETF with an overall A- or better rating is deemed above average in its category, says Todd Rosenbluth, head of research for VettaFi. Ratings are based on scores for liquidity, expenses, performance, volatility, dividends and concentration.
Returns over the trailing three years have their own rating. A rating of B indicates average, so a rating of B or better means only ETFs that scored average or better survived our screening process.
As for discarding from consideration any ETF with an expense ratio of 0.65% or higher, it’s because that’s a fair and easy-to-satisfy cutoff. High-yield bond ETFs tracked by Morningstar Direct–a group that includes all junk bond ETFs–average a 0.43% expense ratio. A whopping 89% of those high-yield-bond ETFs report a prospectus net expense ratio less than 0.65%.
To further trim our pool of contending ETFs, we looked for those with shorter durations. Those are the safest in the current interest-rate environment. Longer-dated bonds are likely to suffer as interest rates continue to rise.
We then screened shorter duration funds for returns. Past returns of course are no guarantee of future performance. But funds with solid 10-year returns have shown ability to thrive amid varied market conditions. They are not flash-in-the-pan portfolios.
Finally, we screened those consistent, long-term solid performers for low expense ratios. Voila! The result is our list of low-cost junk bond ETFs. They’re good sources of income. And they’re built to survive the current uncertain economic environment.
Next Up In Investing
- Buy The Dip: Best Cheap Stocks To Buy Now
- The Best Growth ETFs
- Why Is Inflation So High?
- What Are I Bonds?
- Acorns Review
- Robinhood Review
Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circ*mstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.
Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.
