With yields exceeding 6%, high-yield bond ETFs like the iShares EUR High Yield Corporate Bond UCITS ETF attract income-seeking investors—but some argue it’s still not enough. Is it truly a good deal?
n recent years, high yield bond ETFs have gained significant traction among investors seeking higher returns. These instruments, which allocate capital to debt securities issued by companies with credit ratings below investment-grade standards, offer compelling income opportunities. However, they also come with risks that should not be underestimated.
One of the most widely used ETFs in Europe is the iShares EUR High Yield Corporate Bond UCITS ETF, currently yielding over 6% in dividends.
But is it truly that attractive? To determine this, investors must closely monitor key factors such as the spread, default risk, and broader economic and geopolitical conditions.
Focus on the iShares EUR High Yield Corporate Bond UCITS ETF
The iShares EUR High Yield Corporate Bond UCITS ETF stands as one of the most notable examples of high-yield investment. With an annual Total Expense Ratio (TER) of 0.50% and a sampling replication strategy that selects a representative subset of securities from its benchmark—the iBoxx® EUR Liquid High Yield Index—this ETF aims to track the performance of European high-yield bonds.
Its portfolio, comprising over 615 securities, offers significant diversification, helping to mitigate company-specific risk. With €5.45 billion in assets under management, this ETF ranks among the largest in its category, reflecting strong investor confidence.
One particularly noteworthy aspect is its dividends distribution policy. The current interest yield stands at 6.03%, slightly down from 6.13% in 2024. In 2023, the yield was 5.75%, while in 2022, it was 3.26%. These figures indicate an upward trend, reaching return levels unseen in over two decades.
The True Cost of High-Yield Investments: Understanding the Risk Premium
A critical factor in evaluating high yield investments is assessing their relative cost, which is typically measured by comparing high-yield bond returns to those of investment-grade securities. This difference, commonly referred to as the spread, is often tracked using indicators such as the ICE BofA US High Yield Index Option-Adjusted Spread.
When the spread narrows to historically low levels, the additional return offered by high-yield securities diminishes, reducing the apparent risk premium compared to safer assets. It is important to recognize that high-yield bonds hold lower credit ratings—below BB according to S&P and below Ba2 according to Moody’s—implying a significantly higher risk of default.
If the yield spread becomes too tight, even a slight increase in perceived risk may push investors toward higher-rated securities, leading to reduced demand and downward pressure on high-yield bond prices. In such a scenario, the appeal of a 6%+ yield could be offset by capital losses, underscoring the importance of continuous monitoring of spread levels and risk factors.
Default Risk and Market Outlook According to S&P Global
Default risk is a key metric for assessing the sustainability of high-yield investments. According to S&P Global, the default rate in the euro area was 4.25% as of November 2024. While still moderate, this figure could fluctuate significantly depending on economic and geopolitical developments.
In a pessimistic scenario, the default rate could rise to 6%, increasing investor risk perception and prompting a sell-off in high-yield assets. This shift would weaken demand, putting downward pressure on prices and potentially eroding returns despite high interest payouts.
Conversely, in an optimistic scenario, the default rate could decline to 2.25%, fostering a lower-risk environment and reinforcing investor confidence in the high-yield segment. This outlook could be supported by stronger-than-expected economic growth—specifically, GDP expansion exceeding IMF estimates by at least 0.9%—alongside a gradual reduction in interest rates by the ECB. Such conditions would enhance the sustainability of high-yield investments.
What Lies Ahead? Geopolitical and Economic Scenarios
To fully assess the potential performance of high-yield ETFs, investors must consider the geopolitical and economic landscape that could shape market dynamics.
On the downside, an escalation of the war in Ukraine could trigger a risk-off sentiment, prompting investors to offload high-yield assets. Additionally, political moves—such as potential protectionist tariffs under a renewed Trump administration—could heighten uncertainty in financial markets, further driving capital toward safer investments. These factors could compress spreads and elevate default rates, negatively impacting high-yield ETF valuations.
On the other hand, a more favorable scenario could emerge if economic growth surpasses expectations.
A stronger-than-forecasted GDP expansion, coupled with a dovish monetary policy stance from the ECB, could reduce perceived risk and bolster demand for high-yield securities. In this environment, investors could benefit from stable high returns, reinforcing the attractiveness of high-yield ETFs.
Given these evolving macroeconomic and geopolitical factors, a dynamic investment approach is essential to navigate the complexities of the high-yield market. Continuous assessment of spread trends, default risks, and policy shifts will be crucial in making informed portfolio decisions in an ever-changing financial landscape.
Original article published on Money.it Italy 2025-02-24 12:41:57. Original title: Rende più del 6% all’anno. Ecco uno degli ETF high yield più utilizzati
