There are a few asset classes that investors equate with risk. When it comes to fixed income, high-yield bonds are a good option. After all, they aren’t called “junk bonds” for nothing. Issued by firms with less-than-stellar credit, they feature much higher default rates than investment-grade peers. And in that, many investors only use them for a small satellite position, if at all.
However, many investors may want to rethink that stance.
The global high-yield bond sector is more diverse and less risky than ever. The fixed income segment may actually increase diversification, provide equity-like returns and substantial income, potentially with far less volatility than investors expect. With that in mind, investors may want to add a hefty dose of junk to their portfolios.
A “Risky” Bet
There are a lot of ways to evaluate bonds, but the easiest and quickest tends to be their credit ratings. Just like your credit score, the major credit rating agencies S&P Global, Fitch, and Moody’s will dig into a host of factors and come up with a letter grading for each bond issue and entity. A bond is considered non-investment grade if it has a credit rating below BB+ from Standard & Poor’s and Fitch or Ba1 or below from Moody’s.
The reason why a bond would fall within this category has to do with its potential to default on these obligations. And by default, they do. Looking at several decades’ worth of data, high-yield bonds have averaged annual default rates of roughly 3%–4%. This compares to just 0.1% for investment-grade bonds.
Because of this, investors generally demand higher coupon payments from these issuers, with high-yield bonds on average paying as much as 4 to 5 full percentage points more in yield than their investment-grade bond twins.
Less Risk Than Imagined
But investors may be giving junk bonds a bad rap.
Back in the 1980s, investment bank Drexel Burnham Lambert launched the modern junk bond market by selling new bonds issued to non-investment-grade borrowers. At that time, high-yield bonds really deserved their junk bond status. Before then, non-investment-grade bonds were simply investment-grade firms that had fallen on hard times. They were treated differently by investors and weren’t so “junky”.
What’s interesting is that today’s high-yield market looks like the one before the 1980s, but investors are still treating it as if junk is actually junk. Today’s high-yield market is actually more diverse and features better credit quality than ever before.
In terms of diversity of issuers, the global high-yield bond market is about six times larger than it was in 2000. Moreover, the number of international issuers has swooned. Back in 2000, U.S. bonds made up around 80% of the market. Today, that number is less than 60%, with European issuers accounting for 22% and emerging market issuers at around 17%. That’s a lot of different issuers across various industries and nations. It turns out that’s great for reducing diversification risks. 1
Better still, the credit quality mix has continued to improve.
The increased number of issuers has managed to enhance the average credit rating. So has a couple of other factors. The pandemic significantly reduced the number of riskiest issuers in the broader high-yield indexes by causing a wave of bankruptcies. Additionally, the number of so-called Fallen Angels —or investment grade bonds that are re-rated as the top level of junk —has increased.
This has only served to boost and improve the credit quality of the index. Back in June of 2007, only 41% of the ICE BofA Global High Yield Index was rated BB. Today, that number is over 60%. Likewise, the other end of the credit spectrum has continued to shrink. CCC-rated issuers averaged around 15.7% of the index in 2007. Today, we are looking at a sub-8% market share.
This chart from asset manager T. Rowe Price showcases the shift towards better credit quality and the stronger overall make-up of the index.
Source: T. Rowe Price
T. Rowe Price also notes that junk bond issuers now generate far more revenues and cash flows than before the credit crisis and pandemic, and they are also larger firms to begin with. Additionally, the proportion of secured high-yield bonds has increased since the pandemic. This fact, coupled with better credit ratings, has significantly reduced defaults. The par-weighted 12-month trailing bond default rate has declined to just 0.3% as of the beginning of the year.
To put it in layman’s terms, the high-yield sector isn’t as risky as many investors think. This shows up in risk-adjusted returns, with T. Rowe Price noting that high-yield bonds have had some of the best adjusted returns and Sharpe ratios out of any fixed income sub-asset class over the last decade. According to the asset manager, this means that high-yield bonds actually can reduce risk and boost returns when added to a fixed income portfolio.
Adding A Dose Of Global High-Yield Bonds
With the ability to drive better risk-adjusted outcomes and increased diversification benefits, high-yield bonds don’t deserve their risky moniker. They are, in fact, less dangerous than investors believe. Under that guise, it makes sense to include them in a portfolio, not just as a satellite position but as a main component. And luckily, there are plenty of ways to do just that. ETFs remain the best and easiest way to add junk to a portfolio.
As the opportunity set has expanded globally, investors may want to consider that route. Likewise, an active approach- which gives managers freedom to explore- could also be very fruitful in the sector.
Global & International Junk Bond ETFs
These funds were selected based on their exposure to the global and international junk bond sector. They are sorted by their YTD total return, which ranges from 1.4% to 9.4%. They have assets under management between $30M and $135M. They are currently yielding between 3.35% and 7.35%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| PGHY | Invesco Global ex-US High Yield Corporate Bond ETF | $134M | 9.4% | 7.35% | 0.35% | ETF | No |
| GHYG | iShares US & Intl High Yield Corp Bond ETF | $131M | 7.1% | 6.5% | 0.40% | ETF | No |
| IHY | VanEck International High Yield Bond ETF | $31M | 5% | 5.42% | 0.4% | ETF | No |
| HYXU | iShares Global ex USD High Yield Corporate Bond ETF | $48M | 1.4% | 3.35% | 0.4% | ETF | No |
Active Junk Bond ETFs
These funds are selected based on their ability to access high-yield bonds with an active touch. They are sorted by their YTD total return, which ranges from 1.3% to 4.7%. Their expense ratio ranges from 0.22% to 1.02%, while they have AUMs between $50M and $5.63B. They are currently yielding between 5.7% and 8.6%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| FLHY | Franklin High Yield Corporate ETF | $268M | 4.7% | 5.7% | 0.40% | ETF | Yes |
| YLD | Principal Active High Yield ETF | $160M | 4.7% | 7.2% | 0.39% | ETF | Yes |
| HYBL | SPDR Blackstone High Income ETF | $136M | 4.4% | 8.2% | 0.70% | ETF | Yes |
| THYF | T. Rowe Price U.S. High Yield ETF | $50M | 4.1% | 7.5% | 0.56% | ETF | Yes |
| SRLN | SPDR Blackstone Senior Loan ETF | $5.63B | 3.8% | 8.6% | 0.70% | ETF | Yes |
| FTSL | First Trust Senior Loan Fund | $2.27B | 3.8% | 7.5% | 0.87% | ETF | Yes |
| BKHY | BNY Mellon High Yield Beta ETF | $292M | 3.4% | 6.9% | 0.22% | ETF | Yes |
| PHYL | PGIM Active High Yield Bond ETF | $124M | 3.4% | 8.2% | 0.39% | ETF | Yes |
| HYFI | AB High Yield ETF | $123M | 3.4% | 6.7% | 0.40% | ETF | Yes |
| HYLS | First Trust Tactical High Yield ETF | $1.43B | 1.3% | 6.4% | 1.02% | ETF | Yes |
In the end, junk bonds have continued to get better over the years and now represent a globally diverse basket of less risky bonds. For investors, that means taking advantage of the discrepancies, boosting their yields, and improving their risk-adjusted returns.
Bottom Line
High-yield bonds get a bad rap. But the reality is that they are getting stronger and better every year. With diversification benefits and strong returns, they should be a core piece of your portfolio.
1 T. Rowe Price (August 2025). A new era of global high yield: Stronger, larger, and more diverse
