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High-yield bonds have historically offered
over government bonds or investment grade bonds.
Xtrackers offers a suite of
High-Yield Bond ETFs at low costs.
to an attractive relation of risk and reward.
High-yield bonds, also known as junk bonds, are a specific type of fixed-income security, issued by companies that exhibit a lower credit rating compared to investment-grade bonds. High-yield bonds offer higher yields but come with higher risks. They provide diversification, potential equity-like returns, reduced sensitivity to interest rates, and strong risk-adjusted returns. Types of high-yield bonds include fallen angels and rising stars.
Historically, high-yield bonds have provided strong returns relative to their risk. Investment considerations include enhancing portfolio income and returns while managing risks through diversification.
Fortunately, Xtrackers High-Yield Bond ETFs do this work for you, providing targeted exposure across high-yield bonds from many different corporations, while offering varying levels of credit and interest rate risk.
High-yield bonds could be issued by startups, capital-intensive firms, or businesses undergoing restructuring, which are typically rated speculative-grade due to a higher risk of default.
They can be classified into two types:
Credit rating agencies such as Standard & Poor’s, Moody’s, or Fitch evaluate and classify bonds based on the issuer’s ability to pay interest and principal in a timely manner.
Two main categories are used to help investors assess the default risk and income potential of bond:
Investment-grade bonds may provide more stability as they are issued by companies with robust financial strength that have a higher credit rating, whereas high-yield bonds involve a greater default probability and higher price volatility.
While high-yield bonds carry greater risks, they offer the opportunity to enhance portfolio income and returns. By diversifying across issuers, industries, and regions, and carefully monitoring financial health, investors can mitigate the associated risks. For those with a higher risk tolerance, high-yield bonds can be a valuable component in a well-balanced investment strategy. To highlight why high-yield bonds can be a compelling investment option, it's important to explore their unique benefits.
High-yield bonds play a key role in diversifying portfolios by providing income and potential for capital growth. Their low correlation with other fixed income assets reduces overall risk and enhances portfolio stability.
High-yield bonds have historically offered returns comparable to equities while providing greater downside protection. Their drawdown profile may appeal to investors looking for competitive returns with potentially lower volatility than equities.
Due to their higher coupon payments, high-yield bonds generally have a shorter duration compared to other fixed income investments. This makes them less sensitive to interest rate changes, offering added stability in fluctuating rate environments.
Over the past two decades, high-yield bonds have consistently demonstrated strong risk-adjusted returns, striking a compelling balance between income potential and volatility.
High-Yield Bond ETFs are an easy way to gain exposure to a highly diversified, liquid and transparent bond portfolio. High-Yield Bond ETFs are bought and sold as shares while giving you access to a wide range of underlying assets at once. Whether for the sake of yield enhancement, diversification benefits or seeking exposure to an attractive relation of risk and reward – Xtrackers by DWS offers a suite of six High-Yield Bond ETFs, designed to provide targeted exposure to varying levels of credit and interest rate risk through rules-based strategies. These ETFs act as a versatile toolbox, enabling investors to tailor and manage both credit and duration exposures in their portfolios effectively.
| Xtrackers High-Yield Bond ETFs | Ticker | CUSIP | Gross/Net Expense Ratio |
|---|---|---|---|
| Xtrackers USD High Yield Corporate Bond ETF | HYLB | 233051432 | 0.05/0.05% |
| Xtrackers Low Beta High Yield Bond ETF | HYDW | 233051267 | 0.20%/0.20% |
| Xtrackers High Beta High Yield Bond ETF | HYUP | 233051259 | 0.20%/0.20% |
| Xtrackers Short Duration High Yield Bond ETF | SHYL | 233051283 | 0.20%/0.20% |
| Xtrackers Risk Managed USD High Yield Strategy ETF | HYRM | 23306X100 | 0.35%/0.30% |
| Xtrackers USD High Yield BB-B ex Financials ETF | BHYB | 23306X878 | 0.20%/0.20% |
High-yield securities have historically provided strong returns relative to their risk, making them a useful tool for diversifying beyond traditional stocks or safer fixed income investments. With their unique combination of income and moderate sensitivity to interest rates, high yield bonds can play a key role in achieving a balanced portfolio. To explore how high-yield bonds can fit into your investment strategy, check out the paper on high-yield bonds for allocators from our DWS Research Institute.
High Yield Bonds for Allocators
Research Institute Jan 2024
High-yield corporate bonds can offer investors unique risk-return characteristics, as shown in the comparison among other fixed income markets below. Based on 10-year historical data, high-yield bonds demonstrate an attractive balance between return potential and volatility relative to other fixed income sectors. This analysis can help investors understand how high-yield bonds might fit into a diversified fixed income portfolio, balancing potential returns with risk considerations. The data demonstrates why high-yield bonds often serve as a core holding for investors seeking enhanced yields while accepting moderate volatility levels.
Volatility/return (10-year period as of 12/31/24)
Source: Morningstar as of 12/31/24. Performance is historical and does not guarantee future results. Volatility is measured by standard deviation, which depicts how widely an investment’s returns vary from the investment’s average return over a certain period. Asset-class representation is as follows: mortgage-backed securities, Bloomberg U.S. Mortgage Backed Securities Index; investment-grade bonds, Bloomberg U.S. Aggregate Bond Index; high-yield corporates, Bloomberg U.S. Corporate High Yield Index; 10-year U.S. Treasury, FTSE Treasury Benchmark 10-Year Index; 5-year U.S. Treasury, FTSE Treasury Benchmark 5-Year Index; emerging markets, Bloomberg Emerging Market Aggregate Bond Index; credit (A-rated), Bloomberg U.S. Credit A-Rated Index; long U.S. corporates, Bloomberg Long U.S. Corporate Index; 30-Year U.S. Treasuries, Bloomberg U.S. Treasury Bellwether 30-Year Index. This illustration does not represent the performance of any DWS product, is for informational purposes only and should not be considered tax advice.
Source: ICE Data Services. ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued and settled in the US domestic market.
The effective yield of US dollar high-yield bonds currently stands at attractive levels relative to the past decade. While yields have moderated from their 2023 peak of around 9 percent, they remain elevated at approximately 7 percent – significantly above the lows of about 4 percent seen in 2021.
The effective yield, which measures the total return p.a. investors can expect if bonds are held to maturity, experienced notable spikes during market stress periods, particularly during the COVID-19 outbreak in early 2020 when yields briefly touched 11%. Today's higher yield levels can offer investment opportunities in the high-yield bond market.
Bond ETFs offer your portfolio the opportunity to generate income from interest payments, as opposed to Equity ETFs, which aim for long-term growth. High-Yield Bond ETFs provide investors exposure to debt issued by companies that exhibit a lower credit rating compared to investment-grade bonds. Investors who seek exposure to this part of the bond market are willing to accept a higher risk in return for a higher yield compared to bonds from issuers with investment-grade credit ratings.
The high-yield sector can offer enhanced yields over bonds with investment-grade credit ratings or U.S. Treasury bonds. Investments into the high-yield bond markets are thus perceived with higher risk. However, high-yield bonds can provide high levels of income and low correlation to other asset classes. High-Yield Bond ETFs are an easy way to gain exposure to a highly diversified, liquid and transparent bond portfolio. High-Yield Bond ETFs are bought and sold like shares while giving you access to a wide range of underlying assets at once. They can thereby help investors to diversify their portfolio and can offer downside protection.
High-yield bonds have a lower credit rating, higher income potential, but are also more volatile and have a higher risk of default than non-investment-grade corporate bonds or U.S. sovereign bonds.
High-yield bonds can play a strategic role in a portfolio by enhancing income and providing diversification. Positioned within the fixed income allocation, they offer a unique balance of higher yield potential and lower correlation to traditional fixed income assets, making them particularly useful for investors seeking to diversify overall portfolio risk while pursuing additional returns.
High-yield spreads refer to the difference in yield-to-maturity between high-yield bonds, which carry default risk, and risk-free bonds like U.S. Treasuries. This spread represents the additional return investors demand to compensate for the higher risk associated with high-yield bonds. A wider spread often signals increased perceived risk, while a narrower spread indicates improved market conditions or lower default expectations.
For further definitions of financial terms, please visit the Xtrackers glossary.
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