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High-yield corporate bonds are generating strong returns this year, helped by higher interest rates by the Federal Reserve. Most of these ETFs are yielding over 6%, higher than short-term government bonds and dividends.
The First Trust Tactical High Yield ETF (HYLS) fund has over $1.43 billion while the VanEck Fallen Angel High Yield Bond ETF (ANGL) and Xtrackers USD High Yield Corporate Bond (HYLB) have over $3.01 billion and $3.2 billion, respectively. The three funds yield 6.36%, 5.75%, and 6.06%, respectively.
I believe that these bonds should play a small role in the popular 60/40 portfolio because of their higher yields vs other assets like the Schwab US Dividend Equity ETF (SCHD). These funds invest in mostly identical assets.
However, I believe that investors interested in these high-yield ETFs should avoid the First Trust Tactical High Yield ETF because of its high fees. The fund has an expense ratio of 1.02%, which is higher than the average ratio in the US stands at 0.16%.
A 1.02% expense ratio is substantial considering that you will pay about $1,020 annually if you invest $100k. You will also pay at least $10,000 in a decade, which is a substantial amount of money.
On the other hand, the ANGL and HYLB ETFs have expense ratios of 0.25% and 0.05%. For $100k, the funds will charge you just $250 and $50, respectively.
As such, in this case, it would make sense to invest in the HYLS ETF if it generates stronger returns than the other two. However, a closer look at the three funds shows that it does not generate better returns.
HYLB vs ANGL vs HYLS three-year performance
The HYLS ETF’s total return in 2024 stands at 0.50% while ANGL and HYLB funds have returned 1.6% and 2.06% this year. The same happened in the past five years as the HYLS total return stood at 14.8% while the two came in at 29.3% and 19%, respectively. As shown above, the trend has happened in the past three years.
To be clear: I have always believed that generic ETFs like SPDR S&P 500 (SPY) and the Invesco QQQ (QQQ) ETF are better investments than most funds.
The post Junk bonds: Avoid the HYLS ETF and buy ANGL and HYLB instead appeared first on Invezz
