💰The USHY Advantage: More Bonds, Less Cost

Welcome back, ETF enthusiasts! Today, we’re taking an in-depth look at an ETF that is attracting significant attention in the current high-interest-rate environment: the iShares Broad USD High Yield Corporate Bond ETF (USHY). Whether you’re looking to diversify your portfolio or maximise your yield potential, this analysis will help you determine if USHY deserves a spot in your investment strategy.

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What is USHY?

The iShares Broad USD High Yield Corporate Bond ETF (USHY) offers investors a broad spectrum of U.S. dollar-denominated, high-yield corporate bonds. It is among the most substantial players in the high-yield bond ETF space.

Often called "junk bonds" or "high-yield" bonds, these debt instruments are issued by companies with credit ratings below investment grade (typically below BBB- by S&P or Baa3 by Moody's). While they have a higher risk of default, they offer investors higher yields as compensation.

In today's economy, with interest rates at their highest in over a decade, high-yield corporate bonds are appealing for income. USHY offers an attractive yield of over 7%, significantly higher than traditional fixed-income investments. USHY is similar to HYG, another major iShares high-yield ETF, but has a lower expense ratio and a broader approach.

Investment Strategy📊

Successfully incorporating USHY into your portfolio requires a thoughtful approach. Here are several implementation strategies to consider:

• 🛰️Core-Satellite Approach: Consider using USHY as a satellite position around a core of investment-grade bonds. A typical allocation might be:

  • 70% investment-grade bonds (core)

  • 20% high-yield bonds through USHY (satellite)

  • 10% cash or short-term instruments for flexibility (e.g. ETFs from this list)

• 🤑Income-Focused Strategy: For investors prioritising income generation:

  • 40% dividend-paying stocks (e.g. ETFs from this list)

  • 40% high-yield bonds (USHY)

  • 20% investment-grade bonds for stability

• ⚖️Risk-Managed Approach: For more conservative investors:

  • 60% investment-grade bonds

  • 25% USHY

  • 15% short-term Treasury bills

USHY at a glance

ETF Issuer: iShares

Inception: 2017-10-25

Asset Class: Fixed-Income

Underlying Index: ICE BofA US High Yield Constrained Index

Geographical Focus: U.S.

Expense Ratio: 0.08% (as of last data point)

Dividend Yield: 6.8% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

Since its inception in 2017, USHY has demonstrated its ability to provide consistent income while managing risk effectively. Here's a breakdown of its performance metrics:

• Total Return (2024): +8.30%.

• 3-Year Average Annual Return: +2.91%.

• Volatility Profile: Lower than equity markets but higher than investment-grade bonds, as expected.

ETF Radar View

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

Top 3 Reasons to Invest

1. Superior Yield Potential: USHY's more than 7% yield in today's market environment is particularly attractive. This yield level provides meaningful income that can help offset inflation and contribute to overall portfolio returns. The monthly distribution schedule also appeals to investors seeking regular income streams.

2. Cost-Effective Exposure: With an expense ratio of 0.08%, USHY offers one of the most cost-effective ways to access the high-yield bond market. This low cost helps investors retain more investment returns.

3. Liquidity Advantage: As an ETF with substantial assets under management, USHY offers superior liquidity compared to investing in individual high-yield bonds.

Top 3 Reasons Not to Invest

1. Credit Risk Exposure: By definition, high-yield bonds carry higher default risk than investment-grade bonds. During economic downturns, this risk can become more pronounced as financially weaker companies may struggle to meet their debt obligations.

2. Interest Rate Sensitivity: While high-yield bonds generally have lower interest rate sensitivity than investment-grade bonds, USHY is still subject to price declines when interest rates rise. The ETF's duration of around 4 years means it could experience moderate price volatility in response to rate changes.

3. Economic Cycle Dependency: High-yield bonds are closely correlated with economic conditions. During recessions or economic slowdowns, USHY could experience increased volatility and underperformance.

🔍USHY Decoded: Beyond the Yield

USHY presents an appealing opportunity for investors looking for high income in the current market environment. Its broad diversification, cost-effective exposure, and attractive yield make it a worthwhile consideration for many portfolios. However, it's essential to ensure that any investment aligns with your individual objectives and risk tolerance.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.