With the Fed projecting a longer-than-expected period of high interest rates and other macroeconomic headwinds, the stock market could remain highly volatile in the near future.

To that end, let’s look at the best-performing high-yield bond ETFs iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares Broad USD High Yield Corporate Bond ETF (USHY), and SPDR Bloomberg High Yield Bond ETF (JNK) with a greater potential for returns and enhanced diversification.

The Consumer Price Index (CPI), a key inflation barometer, grew 7.7% in October versus a year ago, the smallest 12-month rise since January. According to Dow Jones, economists estimated a 7.9% annual increase. On a monthly basis, the CPI surged 0.4%, beating economists’ expectations of a 0.6% monthly increase.

While the annual inflation rate is down from a 9.1% peak in June last year and September’s 8.2% reading, it is hovering near the highest levels since the 1980s.

To control sky-high inflation, the Federal Reserve raised its key rate 11 consecutive times since March 2022. The central bank’s benchmark interest rate is now in the 5.25%-5.50% range, the highest level in 22 years. At the end of its two-day monetary policy meeting in November, the Fed left interest rates unchanged.

This marked the second straight meeting that the central bank has opted out of raising its benchmark interest rate, allowing the economy to absorb the effects of higher borrowing costs.

Fed Chairman Powell Jerome suggested that keeping the central bank’s benchmark rate for a prolonged period could slow the economy and control inflation without further rate hikes. Also, Powell, in a panel discussion at the International Monetary Fund, did not rule out another rate increase to help lower inflation to the Fed’s target.

“We are not confident,” Powell said, that the Fed’s benchmark rate is high enough to steadily reduce inflation to 2%. “We know that ongoing progress toward our 2% goal is not assured. Inflation has given us a few head fakes,” he added.

A Wall Street strategist warns investors that last week’s stock market rally likely won’t last. JPMorgan’s Chief Market Strategist Marko Kolanovic said in a note to clients shared with MarketWatch that stocks could head lower in the fourth quarter of 2023 as the market grapples with various challenges, including the Fed likely refusing to cut rates in the face of the slowing economy.

“Falling bond yields and the dovish central bank meetings are being interpreted by equity markets as a positive in the near term,” said Marko Kolanovic.

“However, we believe that equities will soon revert back to an unattractive risk-reward as the Fed is set to remain higher for longer, valuations are rich, earnings expectations remain too optimistic, pricing power is waning, profit margins are at risk and the slowdown in topline growth is set to continue,” he added.

Against this backdrop, investors could consider investing in high-yield bond ETFs. Those interested in a higher current income and having a relatively high tolerance for risk are best suited for this particular ETF group.

Given these encouraging trends, let’s look at the fundamentals of the top three High Yield Bond ETFs, beginning with number 3.

ETF #3: SPDR Bloomberg High Yield Bond ETF (JNK)

JNK seeks to offer a diversified exposure to U.S. dollar-denominated high-yield corporate bonds with above-average liquidity. The fund tracks an index with middle-rated bonds with at least one year to maturity and $600 million or more in outstanding face value. It can provide yields in the double digits for those willing to take on the risks that come along with it.

JNK tracks the Bloomberg High Yield Very Liquid Index. The fund has assets under management (AUM) of $6.56 billion. It currently has a total of 15 holdings.

The fund’s top holdings include State Street Institutional Liquid Reserves Fund (SSIXX) with a 1.18% weighting, TransDigm, Inc. 6.25% 15-MAR-2026 at 0.47%, followed by Mozart Debt Merger Sub, Inc. 3.875% 01-APR-2029 with a 0.44% weighting.

JNK has an expense ratio of 0.40%, lower than the category average of 0.43%. Over the past five days, its fund inflows came in at $649.23 million and $501.29 million over the past month. Also, the ETF has a beta of negative 0.45.

The fund pays an annual dividend of $6.11, translating to a 6.77% yield at the prevailing price level. Its dividend payouts have grown at a 2.5% CAGR over the past three years. The fund’s four-year average yield is 5.42%.

JNK has gained 2.5% over the past year to close the last trading session at $90.25. It has a NAV of $90.21 as of November 9, 2023.

JNK’s POWR Ratings reflect this promising outlook. The fund has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The fund has an A grade for Trade and Buy & Hold. Of the 59 ETFs in the A-rated High Yield Bond ETFs group, JNK is ranked #3.

To access all JNK’s POWR Ratings, click here.

ETF #2: iShares Broad USD High Yield Corporate Bond ETF (USHY)

USHY provides an expansive exposure to the U.S. dollar-denominated corporate high-yield bond market by including issuers from the FX-G10 countries. The fund invests in bonds with a minimum outstanding face value of $250 million, a minimum maturity date of 18 months, and at least one year remaining until maturity.

USHY tracks the ICE BofA US High Yield Constrained Index. With $9.44 billion in AUM, its top holdings are U.S. Dollar with a 0.80% weighting in the fund, followed by TransDigm, Inc. 6.25% 15-MAR-2026 at 0.36%, and Mozart Debt Merger Sub, Inc. 3.875% 01-APR-2029 at 0.33%. The ETF has a total of 2000 holdings.

The fund has an expense ratio of 0.15%, lower than the category average of 0.43%. USHY fund inflows were $526.56 million over the past month and $459.29 million over the past three months.

USHY pays an annual dividend of $2.36, which translates to a 6.79% yield at the current price level. The fund’s dividend payouts have grown at a 1.7% CAGR over the past three years. Its four-year average yield is 5.81%.

The fund has gained marginally over the past month and 2.9% over the past year to close the last trading session at $34.70. It has a beta of 0.44. The fund’s NAV was $34.65 as of November 9, 2023.

USHY’s solid fundamentals are reflected in its POWR Ratings. The fund has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The fund has an A grade for Trade and Buy & Hold. USHY is ranked #2 among 59 ETFs in the A-rated High Yield Bond ETFs group.

Click here to see all the USHY ratings.

ETF #1: iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

HYG is designed to replicate a benchmark that provides a broad representation of the U.S. dollar-denominated high yield liquid corporate bond market. While it replicates much of the overall junk bond market, the fund is often associated with shorter maturity, less interest-rate sensitivity, and less yield. HYG tracks the iBoxx USD Liquid High Yield Index.

HYG has an AUM of $14.52 billion. The fund has a total of 1500 holdings. Its top holdings include TransDigm, Inc. 6.25% 15-MAR-2026 with a 0.46% weighting, Mozart Debt Merger Sub, Inc. 3.875% 01-ARP-2029 at 0.43%, and TIBCO Software Inc. 6.5% 31-MAR-2029 with a 0.40% weighting.

The fund has an expense ratio of 0.49% compared to the category average of 0.43%. Over the past month, HYG fund inflows came in at $2.15 billion and $638.62 million over the past three months. Also, it has a beta of 0.43.

HYG pays an annual dividend of $4.44, translating to a 6.02% yield at the current price level. Its dividend payouts have grown at a 1.7% CAGR over the past three years. The fund’s four-year average yield is 4.98%.

HYG has gained 2.4% over the past year to close the last trading session at $73.70. The fund has a NAV of $73.57 as of November 9, 2023.

HYG’s POWR Ratings reflect this strong outlook. The ETF’s overall A rating translates to a Strong Buy in our proprietary rating system.

The fund has a grade of A for Buy & Hold and Trade. It tops the list of 59 ETFs in the same group.

To access all the POWR Ratings for HYG, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

HYG shares rose $0.02 (+0.03%) in premarket trading Friday. Year-to-date, HYG has gained 5.25%, versus a 15.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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