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To determine our top choices for the best junk bond ETFs, we screened the available universe of high-yield corporate bond funds using the following criteria:
- Funds with an overall credit rating of A- or better
- A credit rating of B or better for returns
- An expense ratio of less than 0.65%
An ETF with an overall A- or better rating is deemed above average in its category, says Todd Rosenbluth, head of research for VettaFi. Ratings are based on scores for liquidity, expenses, performance, volatility, dividends and concentration.
Returns over the trailing three years have their own rating. A rating of B indicates average, so a rating of B or better means only ETFs that scored average or better survived our screening process.
As for discarding from consideration any ETF with an expense ratio of 0.65% or higher, it’s because that’s a fair and easy-to-satisfy cutoff. High-yield bond ETFs tracked by Morningstar Direct–a group that includes all junk bond ETFs–average a 0.43% expense ratio. A whopping 89% of those high-yield-bond ETFs report a prospectus net expense ratio less than 0.65%.
To further trim our pool of contending ETFs, we looked for those with shorter durations. Those are the safest in the current interest-rate environment. Longer-dated bonds are likely to suffer as interest rates continue to rise.
We then screened shorter duration funds for returns. Past returns of course are no guarantee of future performance. But funds with solid 10-year returns have shown ability to thrive amid varied market conditions. They are not flash-in-the-pan portfolios.
Finally, we screened those consistent, long-term solid performers for low expense ratios. Voila! The result is our list of low-cost junk bond ETFs. They’re good sources of income. And they’re built to survive the current uncertain economic environment.