IShares Broad USD High Yield Corporate Bond ETF captures the majority of the U.S. high-yield bond market at an attractive price tag, but there are better options. Its straightforward indexing approach loses some efficacy here given the highly asymmetrical risk profile and inefficient pricings of junk bonds.

The fund tracks the ICE BofA US High Yield Constrained Index, which sweeps in U.S.-dollar-denominated corporate bonds with below-investment-grade credit ratings. Eligible bonds must have at least one year remaining to maturity and at least $250 million in amount outstanding. This size threshold is lower than many of its indexed peers, which should provide a more comprehensive exposure to the high-yield bond market.

The index excludes equity-linked securities, Eurodollar bonds, and contingent capital securities, except for those triggered at the discretion of regulators. Selected bonds are weighted by their market value, subject to a 2% cap on individual issuer’s weightings to prevent issuer-level concentration. The end result is a broadly diversified portfolio that captures much of the high-yield opportunity set, which has kept the fund’s performance in line with its category average. 

However, this is not how all category peers construct their portfolio. Many actively managed high-yield funds can hold bonds rated BBB to provide some relief during credit shocks, or use more discretion with riskier bonds. This can work to their advantage because lower-rated bonds tend to have a wider return distribution with large tail risk, where fundamental research can help distinguish yield traps from companies with lower default risk.

On the other hand, the fund is often well-positioned to benefit from rallies thanks to its broad scope, which maintains exposure to the entire high-yield market when peers may have moved away. For instance, the fund outpaced the category average by 3.79 percentage points during the recovery period from late March through December 2020 after the coronavirus-driven shock. Overall, the fund’s broad exposure and a rock-bottom fee have served it well. It preserved its edge over the category average from its 2017 inception through September 2023, despite unfavorable conditions over those years.

Analyst Rating

Simple and broad, but there are better options for high-yield bonds.

Analyst

Lan Anh Tran

IShares Broad USD High Yield Corporate Bond ETF provides investors with straightforward access to a broad swath of high-yield corporate bonds. However, the large tail risk and inefficient pricing prevalent in high-yield bonds do not lend themselves to indexing easily. The fund earns a Process rating of Average.

Average

Process

BlackRock boasts a large and experienced team reinforced by sector specialists, supporting personnel, and centralized trading desks, which mitigates key-person risk and underpins an Above Average People rating.

Portfolio management is a team effort at BlackRock, so the named manager interacts with a wider team of traders and managers to execute the fund’s day-to-day operations. A separate index analytics team researches and helps prepare for corporate actions and index changes. Most of the portfolio management process is automated as BlackRock’s Aladdin platform and its optimization algorithm fulfills much of the portfolio management tasks. Portfolio managers focus on keeping portfolio statistics within tight tracking targets, utilizing discretion when there’s an opportunity for added value. BlackRock’s risk team works continuously with the managers to address rising challenges and improve processes in addition to regular formal reviews.

James Mauro and Karen Uyehara oversee the broad team of fixed-income managers responsible for North American iShares index funds. Mauro joined BlackRock in 2010 from State Street, while Uyehara came from Western Asset the same year.

Above Average

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

iShares Broad USD High Yield Corporate Bond ETF

USHY tracks a market value-weighted index of USD-denominated high yield corporate debt with broad maturities.

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HYG is the largest high-yield bond ETF in the market. It is not a particularly good choice. A look at the fund, and some better alternatives, follows.

Consider Selling HYG And Buying SPHY Or USHY Instead

iShares Broad USD High Yield Corporate Bond ETF has a broad diversification and decent performance compared to peers, but mid-term outlook is not appealing. Current credit spreads suggest high-yield bonds are priced optimistically, despite worsening economic data. Investors should proceed with caution and be aware of risks when investing in USHY and similar high-yield bond ETFs.

USHY: Not Enough Premium For The Risk

Credit spreads are abnormally tight, indicating a potential risk of a credit event in the bond market. The iShares Broad USD High Yield Corporate Bond ETF may not be the best choice for investors due to the potential credit event. USHY offers a higher yield compared to other high yield bond ETFs, but carries significant risks. Investors should carefully consider these risks before investing.

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Goldman Sachs predicts an increase in domestic high-yield defaults, followed by a retreat in the second half of next year. In August, corporate defaults reached the highest level since 2009, while corporate buybacks were down 20.4% in Q2. The iShares Broad USD High Yield Corporate Bond ETF offers a high yield-to-maturity compared to the S&P 500, but credit spreads remain modest.

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USHY's implied credit spread for its higher yield portfolio is in line with the broader market, but where historically spreads are low in the face of a recession. This seems to mean that the market believes that the inflation is mostly supply side and that current rates aren't that high above healthy neutral rates. While we tend to agree with aspects of this idea, USHY has no upside if markets are wrong, so we're not interested.

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