HYG Revealed: The New Wave of Earning Through Bonds 🌊

Hello and Happy Tuesday to All Our ETF UNO Friends! We're super excited to bring you today's edition of the newsletter, where we're diving into the HYG ETF! For investors looking for income, HYG provides exposure to higher risk, higher yield corporate bonds issued by US companies. We'll cover what HYG is, why corporate bonds are getting so much attention, compare different types of bonds, and give you the lowdown on HYG's past performance. Plus, we'll explore the pros and cons to help you figure out if it's right for you. Let's get started!

What is HYG?

The HYG ETF (iShares iBoxx $ High Yield Corporate Bond ETF) provides investors with convenient access to a diversified portfolio of higher-risk, higher-yield U.S. corporate bonds. As the name suggests, HYG tracks an index composed of dollar-denominated high yield debt issued by U.S. companies.

In plain terms, you can think of HYG as a pre-packaged bond basket product. It aggregates over 1,200 individual corporate bonds into a single ticker that trades like a stock. The ETF aims to offer the key benefits of high yield bonds - namely greater income potential than investment grade bonds - while simplifying ownership through a pooled structure.

Instead of having to build and manage a portfolio of high yield bonds yourself, HYG lets you essentially "outsource" that process. You gain instant diversification across various sectors and credit ratings tiers, from BB to CCC, just by buying HYG shares. The fund then passes through the interest payments generated by its holdings monthly. This ETF is managed by iShares as many of the ones we already introduced in the newsletters.

So for investors willing to take on some additional risk in exchange for higher coupon income, HYG can be an efficient fixed income solution. It provides easy access to a wide swath of the high yield corporate market in one tidy package.

👀All Eyes on Corporate Bonds

Now let's talk more about why investors have been flowing into corporate bonds lately. There's been a notable shift in the investment landscape, particularly as interest rates have ascended in the past year (2022-2023). This rise in rates directly impacts the yields on newly issued corporate bonds, making them more attractive. Here's why:

• 📈Higher Yields on New Issues: With interest rates climbing, newly issued corporate bonds are offering higher yields. This is a big draw for investors looking for more lucrative income streams. These higher yields reflect the increased return that investors can expect for their capital investment in these bonds.

• 💰Comparative Income Advantage: When you stack corporate bonds against traditional low-yield investments like Treasury bonds or Certificates of Deposit (CDs), the difference becomes stark. Corporate bonds now stand out as they offer significantly higher income. Consider that 10-year Treasury notes pay out around 3.5%. Meanwhile, an investor can capture nearly double that yield from a diversified basket of corporate bonds rated BBB or below.

• ⚖️Diversification and Risk Balance: Corporate bonds add an interesting layer of diversification to investment portfolios. They strike a middle ground, offering higher returns than government bonds but typically come with lower risk than stocks. This balance makes them a compelling choice for a wide range of investment strategies, especially in a volatile market.

To BBB or Not BBB? 🤔 The Investment-Grade vs. High-Yield Bond

Investment-grade bonds are seen as safer investments. They are given a higher credit rating (BBB- or higher by Standard & Poor’s, or Baa3 or higher by Moody's) because the companies or governments that issue them are more likely to pay back their debt. This means they are less risky, but they also offer lower returns (yields).

Non-investment grade bonds, or high-yield bonds, are riskier. They have lower credit ratings, indicating that the issuers are more likely to default on their debt. However, these bonds offer higher returns to make up for the increased risk.

Despite being riskier, high-yield bonds can be good investments under the right conditions, like when the economy is stable or improving. They can offer higher returns, which can be attractive for those willing to take on more risk. Below is a comparison table:

In short, investment-grade bonds are for those who want stability and are okay with lower returns, while high-yield bonds suit those looking for higher returns and who can handle more risk.

HYG at a glance

Asset Class: Fixed Income

Underlying Index: iBoxx USD Liquid High Yield index

Geographical Focus: U.S.

Sector Focus: All major sectors

Expense Ratio: 0.49% (as of last data point)

Dividend Yield: >6% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

Now looking at HYG's historical performance paints a compelling picture for investors. Over the last 10 years, HYG has produced an average annual return of 5.3%. The 30-day SEC yield, which indicates the income paid, is currently 6.8%. This steady income comes from monthly distributions generated by the high yield bonds held.

Despite drawdowns during recessions or market turmoil, HYG has recovered well over the long run. The chart shows how a $100 investment 10 years ago would be worth over $140 today with dividends reinvested.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest in HYG

1. Reliable Income Stream: With its focus on high yield bonds, HYG can be a source of regular income on a monthly basis.

2. Diversification: HYG grants exposure to 400+ bonds across sectors like healthcare, oil pipelines, retail, and automotive. This diversification helps reduce the risk of concentration in any single issuer.

3. Strong Track Record: Compared to investment grade bond funds, HYG has achieved higher total returns over the last 5 and 10 year periods.

Top 3 Reasons Not to Invest in HYG

1. Market Volatility: If rates spike, HYG's share price could drop as higher yielding bonds become available.

2. Vulnerability in Recessions: Lower rated debt carries a higher credit risk of default during economic slowdowns.

3. Price Volatility: HYG has experienced higher volatility than investment-grade bond funds.

🔒HYG: Balancing Safety and Income

HYG offers investors a way to tap into higher yielding corporate bonds that provide both solid income and long term appreciation. But the additional risks mean HYG may not be suitable for all investors. As always, know your personal risk tolerance and investment timeframe before investing.

We hope this deep dive into the HYG ETF has been enlightening! For more insights like these, don't forget to sign up for our exclusive ETF UNO newsletter. Please feel free to reach out with any questions or requests for future newsletter topics. Let's make informed investment choices together!

DISCLAIMER: This newsletter is for educational purposes only and does not constitute financial advice.