4 High-Yield Bond Funds To Bank On Strong Inflow (Revised)

Investors have developed an appetite for high-risk instruments, having bet more than $2 billion on U.S.-based high-yield junk bond funds and more than $2.9 billion on U.S.-based investment-grade corporate bond funds in the past week. Fed’s no-rate-hike decision and substantial progress in U.S.-China trade talks were the major tailwinds driving the weekly inflows.

According to Refinitiv’s Lipper research service data, the $2 billion inflow into U.S.-based, high-yield junk bond funds marks the fourth consecutive week of inflow for the group, Reuters reported. U.S.-based investment-grade corporate bond funds also witnessed a strong inflow after early January.

Federal Reserve’s decision to keep its benchmark interest rates at bay was a crucial reason for this increase in investments in such high-risk assets. The central bank’s decision to freeze interest rates for the rest of this year (currently in the range of 2.25-2.5%) was due to concerns about a global economic slowdown.

The prospect of a trade deal made investors highly optimistic, boosting their risk-taking attitude. After President Donald Trump said last week that he was willing to extend the deadline to delay raising tariffs on Chinese goods, investors rushed to high-yield or junk bond funds.

Per the Reuters report, high-yield bond funds gave an encouraging performance in the first quarter, gaining 6.56%, as noted by Pat Keon, senior research analyst at Lipper.

Why Invest in High-Yield Bond Funds?

High-yield bond funds primarily invest in debt obligations with lower credit ratings. Therefore, the nature of these investments ensures that the funds have higher risks associated with them. This could imply that the company’s financials are risky, and hence offer high returns.

However, just because a company’s creditworthiness is low, it doesn’t necessarily mean that its financials are in bad shape. A company’s lower credit rating could be a result of many factors other than bad financials. A new company that has a weaker track record and financial data for evaluation or a large company that is undergoing a tough phase could be sporting a lower credit rating, but could prove to be an apt investment.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Our Choices

We have selected a few high-yield bond funds that you could consider adding to your portfolio. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Series Floating Rate High Income Fund FFHCX seeks to provide a high level of current income. The fund invests a minimum of 80% of its assets in floating rate loans. These floating rate loans are usually lower-quality debt securities, also referred to as high-yield debt securities. The fund invests in other floating rate securities as well. FFHCX invests in U.S. and non-U.S. companies alike.

This Zacks sector – High Yield-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FFHCX has an annual expense ratio of 0.01%, which is below the category average of 1.08%. The fund has three and five-year returns of 6.6% and 3.4%, respectively. FFHCX has no minimum initial investment.

MFS High Income Fund Class A MHITX aims for total return. The fund invests at least 80% of its assets in high-income debt instruments. MHITX may also invest its assets in other types of debt instruments. These debt instruments comprise foreign government securities, corporate bonds, floating rate loans etc.

This Zacks sector – High Yield-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MHITX has an annual expense ratio of 0.95%, which is below the category average of 1.02%. The fund has three and five-year returns of 6.7% and 3.6%, respectively. MHITXhas a minimum initial investment of $1000.

Vanguard High-Yield Corporate Fund Investor Shares VWEHX aims for a high level of current income. The fund mostly invests in a diversified group of high-yielding, high-risk corporate bonds that bear medium and lower-range credit quality ratings. The fund invests the majority of its assets in corporate bonds that are rated below Baa by Moody's Investors Service, Inc.

This Zacks sector – High Yield-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VWEHX has an annual expense ratio of 0.23%, which is below the category average of 1.02%. The fund has three and five-year returns of 6.7% and 4.5%, respectively. VWEHX has a minimum initial investment of $3000.

USAA Short-Term Bond Fund USSBX seeks high current income that is consistent with capital preservation. The fund invests the majority of its net assets in a wide range of investment-grade debt securities that have a dollar-weighted average portfolio maturity of three years or less. The fund’s investments may include debt securities of U.S., state, and local governments, asset- and mortgage-backed securities among others. USSBX also invests in other securities that have debt-like characteristics.

This Zacks sector – High Yield-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

USSBX has an annual expense ratio of 0.58%, which is below the category average of 0.75%. The fund has three and five-year returns of 2.4% and 1.9%, respectively. USSBX has a minimum initial investment of $3000.

(We are reissuing this article to correct a mistake. The original article, issued on April 8, 2019, should no longer be relied upon.)