What are junk bond ETF's?

[John Naronha]

[Ignatius Bose]

When you buy a bond, you are lending money either to the Government or a corporate entity who promises to return your money along with the coupon/interest on maturity. The ability of the issuer to repay the debt of investors is defined by the bond's credit rating. Bonds that carry high credit rating are called investment grade bonds and those which are likely to default on payments are termed as speculative or non-investment grade bonds. The latter are mostly issued by companies that do not have a long track record, have defaulted in the past or those that are not fiscally sound to meet their future obligations. Brokers generally do not invest in non-investment grade bonds because of the high default risk and the speculative nature, due to which they are called Junk Bonds or High Yield Bonds. In other words, Junk Bonds are high risk-high return corporate bonds and ETF funds that invest in these Junk Bonds are called Junk Bond ETFs. Some of the well-known Junk Bond ETFs are:

BlackRock High Yield Bond Fund (BHYIX)

Barclays High Yield Bond ETF (JNK)

Invesco Senior Loan ETF (BKLN)

Fidelity Capital and Income Fund (FAGIX)

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

[Chrispus]

Hi John,

A Junk Bond ETF rests on non-investment grade bonds. Such bonds have a BBB rating or lower. These bonds come with heightened default risks. However, they offer investors well above average yields.
A Junk Bond ETF presents an investor with a high-risk tolerance and opportunities to play yield curves and interest rates. An investor needs to monitor their holdings as closely as daily, though.
In other words, a High-Yield ETF, also named a Junk Bond ETF, provides a trader with exposure to debts owed by US companies rated below BBB. Since such High-Yield ETFs have amplified risks, they present investors with attractive returns as compensation for their enhanced risks.
An example is the iShares iBoxx $ High Yield Corporate Bond ETF, HYG A. This ETF tracks the results of the Markit iBoxx USD Liquid High Yield Index investments. This index consists of high yielding US corporation bonds with a less than investment grade classification.
 

[Leonel]

Hello John,

Thanks for asking.

These corporate bonds provide high returns to make up for their high risks. Taking an individual’s credit score; those with weak positions incur hefty interests while their highly-rated counterparts enjoy lower charges. Such is the case for bonds where the issuing agency acts as the borrower and the bond trader the lender.
Junk bonds are characterized by a BB ranking and below where AAA represents the best offerings. The good news is a junk bond’s status can be upgraded when business improves, hence, distinguishing them from other bonds. They’re also related to stocks only that they offer fixed interest payments. As such, bondholders are compensated before stockholders during bankruptcy.
Although their term is ten years, you can call them after four or five years. Ordinarily, junk bonds are at their peak during a business cycle’s expansion stage. This is because a good economy reduces the possibility of underlying companies defaulting. On the downside, you lose all your capital when the business doesn’t pay. This calls for the analysis of every company’s credit risk.
 

[Nick R]

Hey,

Junk Bond ETFs, also known as High-yield ETFs, offer exposure to the debt of US companies rated below BBB. Junk Bond ETFs are considered high-risk investments that need to deliver large returns to compensate for that risk. 

iShares iBoxx USD High Yield Corporate Bond ETF is the largest high-yield ETF which holds around $27.79 billion in assets.
 

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