The persistence of high interest rates continues to present a great opportunity to lock in up to a 9% net yield with certain bond and loan ETFs. Compared to high yield dividend stocks, bond ETFs are many times safer. This makes them an ideal instrument for income investors.
In this article, we will list our top five bond and loan ETFs at this time.
What’s more, we built a diversified ETF portfolio with these five ETFs. It generates a yield of 7.1%, net of fees.
Learn more about SHV 📈, ANGL 📈, SJNK 📈, CMBS 📈 and BKLN 📈 in this article.
SPDR® Bloomberg Short Term High Yield Bond ETF. SJNK 📈
This ETF provides diversified exposure to short-term US dollar-denominated high yield corporate bonds. Spreading exposure risk across over 1,000 individual holdings, it’s a cost-efficient and risk averse way to benefit from this asset class’s attractive yield.
Net yield*: 8.15%
Total assets: $4.4bn
Holdings: 1,005
Issuer: State Street
Why is SJNK attractive?
With an average yield to maturity of 8.46%, SJNK offers a juicy return to income investors. Counterparty risk is spread out nicely across more than 1,000 bonds. Carnival Holdings represents the largest exposure at just 0.53%. As the US economy continues to grow, the default rate among corporate bond issuers can be expected to remain low by historical standards.
Ishares Short Treasury Bond ETF. SHV 📈
This ETF mirrors an index composed of U.S. Treasury bonds with remaining maturities one year or less.
Net yield*: 5.19%
Total assets: $18bn
Issuer: Blackrock
To put things in perspective, as recently as in 2021 and 2022, Nvidia had already been a beneficiary of a massive trend. Back then, the company was benefiting from the hype in cryptocurrencies, and the accompanying search in demand for its GPUs. At the time, however, its EBITDA margin “only” reached 40%.
Why is SHV attractive?
SHV offers a virtually risk-free net yield of 4.95%. Counterparty risk with the US government can be considered nil. Duration of just a few months minimizes interest rate risk. There is hardly a more efficient and safer way to park cash at a 5% return.
VanEck Fallen Angel High Yield Bond ETF. ANGL 📈
Fallen angels are corporate issuers that recently lost investment grade status. This means their issuer rating was downgraded below BBB-. While this does not reflect a massively lower credit quality, many bond funds are forced to mechanically sell bonds that no longer qualify as investment grade. The ensuing sell-off pressure opens up arbitrage opportunities.
Net yield: 6.53%
Total assets: $3bn
Issuer: VanEck
Why is ANGL attractive?
Thanks to the above mentioned arbitrage opportunity, fallen angels have outperformed the broad high yield bond market in 14 of the last 20 calendar years. Overall, an ETF comprising fallen angels benefits from a higher average credit quality than the broad high yield bond universe.
iShares CMBS ETF. CMBS 📈
This ETF comprises a basket of extremely safe and highly rated commercial mortgage-backed securities. 97% of the bonds are rated AA or better.
Net yield*: 5.52%
Total assets: $430m
Issuer: Blackrock
Why is CMBS attractive?
CMBS offers a great opportunity to diversify the asset class exposure of your bond ETF portfolio. With an equity beta of 0.18, correlation to equities markets is very low. Credit quality of the bonds held by CMBS is outstanding. 60% of bonds is rated AAA and 35% is rated AA.
Invesco Senior Loan ETF. BKLN 📈
The BKLN ETF invests in the largest institutional leveraged loans based on market weightings, spreads and interest payments. Leveraged loans are generally loans taken out by a private equity firm to fund an acquisition.
Net yield*: 8.80%
Total assets: $7.4bn
Issuer: Invesco
Why is BKLN attractive?
BKLN offers a juicy net yield of roughly 7.5%. The yield level is attractive given that leveraged loans are generally collateralized and rated in the BB to BBB range, ie. the mix of loans in BKLN is of better quality compared to a junk bond ETF.
What makes BKLN particularly attractive is its price stability. Since most leveraged loans are floating rate instruments, the ETFs carries little to no interest rate risk. This makes a highly attractive alternative to high yield dividend stocks, which in so many instances have proven to be value traps.
An opportune time
Whether you choose the higher-yielding ETFs, the safest option with Treasuries or a mix of both, your portfolio will benefit from a solid source of recurring income. At rates between 5 and 9%, you will quickly see the compound effect play out in your long-term investing journey.
As the following chart by the Federal Reserve Bank of St. Louis shows, US high yield rates remain at attractive levels when put into historical perspective.
Ice Data Indices, LLC, ICE BofA US High Yield Index Effective Yield [BAMLH0A0HYM2EY], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY, April 17, 2024.
In conclusion, it’s an opportune time to lock in the currently available yields. It’s unlikely that rates will go higher. Rather, economists expect two rate cuts this year. If interest rates decline, you will not only have locked in yields of 7% or more, but benefit from valuation gains (as the value of a bond and interest rates have an inverse relationship).
Important notice
This article is not to be understood as a recommendation to buy or sell. Please conduct your own research before making investment decisions. To this end, we aim to provide you with the best portfolio management tool and investment research data possible. However, we cannot guarantee the accuracy of this information in spite of our extensive efforts to ensure that the data is complete and 100% accurate.
Disclosure
We do not receive compensation from any of the ETF issuers mentioned in this article. Ziggma team members presently hold shares in the ETF mentioned in this article.
* Weighted average yield to maturity less fees