Examples of bonds funds and ETFs

High Yield Corporate Bonds

High yield corporate bonds are the riskiest part of the bond market because they are considered the most likely to default during economic downturns. Investors may not get their capital back in full when this happens although the effect is mitigated by the diversification offered by funds.

Bond fund managers consider high yield bonds similar in terms of risk to owning equities which is reflected in the higher yields. With yields around 8% some investors believe the risk to return ratio is attractive. That said, high yield corporate bonds are only suitable for investors willing and able to take a lot of risk.

XTrackers XT USD High Yield Corporate Bond ETF (XUHG) aims to track a very liquid part of the Bloomberg US Corporate high yield index. It has a trailing yield of 6.13% and an ongoing charge of 0.2% a year.

Emerging Market Bonds

Emerging government debt markets offer higher yields than developed markets, currently at around 5.5%. They are further along the rate hiking cycle than the US and Europe according to US financial services firm Capital Group because they started earlier.

Asset manager BlackRock points out that the fundamentals of emerging market debt are better than you might think. For example, more than 55% of emerging market debt is considered investment grade and governments are far less indebted than their developed markets counterparts.

While these managers make a good case for investing in emerging markets, it is considered risker than developed market sovereign debt. Political risk and currency devaluations complicate the pure investment considerations.

One example of a tracker fund in this space is Vanguard USD Emerging Market Government Bond ETF (VEMT) which tracks bonds issued by emerging market governments. It has a trailing yield of 5.02% and an ongoing charge of 0.25%.

By Martin Gamble Education Editor