June 22, 2023

Investors Can Help Boost Income and Liquidity with Active High-Yield ETFs

5 min read

As the US economy begins to feel the weight of the Federal Reserve’s rate hikes, investors have grown leery of US high-yield corporate bonds. But instead of bracing for a wave of downgrades and defaults, we think income-seeking investors should embrace high yield. And actively managed exchange-traded funds (ETFs) provide the means to do so.


Strong Fundamentals Late in the Cycle

At the brink of most slowdowns, corporate fundamentals are already weak. But today’s high-yield bond issuers are in much better shape financially than issuers entering past slowdowns, thanks in part to an extended period of uncertainty surrounding the coronavirus pandemic.

This uncertainty led companies to manage their balance sheets conservatively over the past few years, even as profitability recovered. As a result, leverage and coverage ratios, margins, and free cash flow (what is left after a business pays its day-to-day operating expenses) improved—and corporate issuers can now withstand more pressure as growth and demand slow. Further, the default cycle triggered by the pandemic—with defaults peaking at 6.3% in October 2020—effectively cleaned up the sector. The weakest companies defaulted and are now no longer part of the investable universe. Since then, we believe there simply hasn’t been enough time for the survivors to develop unhealthy financial habits. 

We believe the pandemic-led wave of defaults and downgrades also strengthened the average quality of the high-yield market, as many of the lowest-rated bonds defaulted and fell out of indices, while formerly investment-grade bonds fell into the high-yield market as fallen angels. Consequently, the quality of today’s high-yield market is unusually high, with BB-rated bonds comprising 49% of the market, versus 43% on average over the past 20 years.

High Yield That’s Truly High

And today’s yields are compelling too. Yields on high-yield corporate bonds are higher recently than they’ve been in years, giving income-seeking investors a long-awaited opportunity to fill their tanks. What’s more, history shows that the US high-yield sector’s yield has been an excellent proxy for its return over the following five years. In fact, US high yield has performed predictably, even through rough markets (Display).


Indeed, high-yield bonds supply an income stream that few other assets can match. That’s why, even in the late stages of the credit cycle, we think high-yield bonds should play a role in the portfolios of income-seeking investors. 

Easier Access, Enhanced Liquidity with Active ETFs

While trading costs can be larger in the high-yield market than in more broadly traded markets, major market disruptions over the past 15 years—the global financial crisis, the taper tantrum of 2013 and the onset of the COVID-19 pandemic—illustrate the liquidity advantage of an ETF overlay. In those episodes, when liquidity dried up in the high-yield market, the higher trading volume of ETFs worked as a type of relief valve for liquidity. 

Actively managed ETFs have exploded in popularity1 since 2020, thanks to the ETF wrappers’ liquidity, transparency and tax efficiency, combined with the benefits of active management at a lower cost. In April 2023, AllianceBernstein successfully completed its first mutual-fund-to-ETF conversion. The AB High Yield ETF (ticker: HYFI) is an actively managed ETF that seeks to provide high income and maximize capital appreciation through a combination of security-level fundamental and quantitative analysis. HYFI gives investors access to AB’s acclaimed high-yield bond investment strategy, with a decade-long track record, at a low cost. 

Find out more about AB High Yield ETF and AB’s actively managed ETFs here.

1 Funds Europe.com, Active ETFs see heightened inflows, May 30, 2023

Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision.

As of January 31, 2023, HYFI’s expense ratio was 0.40%. 


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Distributed by Foreside Fund Services, LLC. Foreside is not affiliated with AllianceBernstein.