High-yield bonds are debt securities issued by corporations. These provide a higher yield than investment-grade bonds but are riskier investments. The corporate bonds represent debt issued by a firm with the promise to pay interest and return the principal on maturity. Junk bonds are issued by companies with poorer credit quality.
They carry lower credit ratings from the leading credit agencies, usually Ba1 or lower by Moody’s, or BB+ or lower by Standard & Poor’s or Fitch. These bonds have significant holdings in smaller companies, which are considered to have a weaker financial condition but benefit as the economy moves north. Though high-yield bonds are more exposed to credit risk, these have less exposure to interest rate risk, making them a differentiated source of return.
Below, we share with you three top-ranked high-yield bond mutual funds, viz.,T. Rowe Price Floating Rate Adv PAFRX, American Funds American High-Income Trust Fund AHITX and Fidelity Capital & Income FAGIX. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of funds.
T. Rowe Price Floating Rate Adv fund invests its assets along with borrowing, if any, in floating rate loans and floating rate debt securities, wherein floating rate loans represent amounts borrowed by companies or other entities from banks and other lenders. PAFRX advisors invest mostly in funds that are below investment grade or junk or unrated securities.
T. Rowe Price Floating Rate Adv has three-year annualized returns of 6.4%. PAFRX has an expense ratio of 0.97%.
American Funds American High-Income Trust Fund seeks a high level of current income by investing in high-yield, high-risk bonds and other similar securities, including preferred stocks. AHITX also invests in common stocks or equity-related securities.
American Funds American High-Income Trust Fund has three-year annualized returns of 3.5%. David A. Daigle has been one of the fund managers of AHITX since December 2003.
Fidelity Capital & Income seeks to provide income and capital growth. FAGIX invests mainly in equity and debt securities, including defaulted securities, with an emphasis on lower-quality debt securities.
Fidelity Capital & Income has three-year annualized returns of 3.8%. As of the end of October 2024, FAGIX held 1.2% of its net assets in Ally Financial Inc.
To view the Zacks Rank and the past performance of all high-yield bond funds, investors can click here to see the complete list of high-yield bond funds.
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