Recommendation: Key high yield and investment-grade bond ETFs

High yield and investment-grade corporate bonds: A key guide (Part 4 of 4)

(Continued from Part 3)

Important ETFs

Some well known high yield bond ETFs include the iShares iBoxx $ High Yield Corporate Bond (HYG), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the PowerShares High Yield Corporate Bond (PHB)—each tracking their own benchmark of the most liquid high yield bonds in the U.S. market.

There are many ETFs in the market that track investment-grade corporate bonds. The most popular is the iShares iBoxx $ Investment Grade Corporate Bond Fund ETF (LQD). LQD seeks to replicate the price and yield performance, before fees and expenses, of the Markit iBoxxA USD Liquid Investment Grade Index. The ETF has a gross expense ratio of 0.15%. The top ten holdings of the ETF collectively account for 6.1% of the asset, including Verizon Communications (VZ) and Merrill Lynch Co. (BAC) with the highest holdings.

Verizon, an American broadband and telecommunications company based in New York City, accounts for 0.67% of the total ETF assets. The company has a total outstanding bond value of $98 billion, with leverage ratio of 2.02x. There are a number of ways to calculated leverage ratios, including debt-to-EBITDA, EBIT–to–interest expense, debt-to-capital, and debt-to-equity ratios. However, for the above example, we’ve used total debt–to–EBITDA. The ratio shows a company’s ability to pay off its debt, and it’s commonly used by credit rating agencies to assess the default risk on the bonds and loans.

Plus, since longer-maturity bonds are more sensitive to interest rate variations (higher duration risk), there are also several options available based on maturity: the iShares Barclays 1-3 Year Credit Bond Fund (CSJ), the Vanguard Short Term Corporate Bond ETF (VCSH)(one to five years), and the iShares Barclays Inter Corporate Bond Fund ETF (CIU)(one to ten years).

To learn more about investing in fixed income ETFs, see the Market Realist series Comparing leveraged loans and high yield bonds: A guide.

Browse this series on Market Realist:

• Part 1 - Comparing high yield bonds and investment-grade corporate bonds

• Part 2 - Why high yield means more interest risk than investment-grade bonds

• Part 3 - Key differences between high yield and investment-grade bonds