Are These Riskier Bond ETFs Worth the Higher Yields?

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Bond yields are much higher today than they were in the era of zero interest rates. The income is drawing interest from investors wanting to benefit from the juicier payouts, and the money is flowing in. Multisector bond ETFs attracted $25 billion over the first 10 months of the year. High-yield bond ETFs had less, but still collected $6.7 billion. What are the risks of these ETFs, and how do they fit in your portfolio? Dan Sotiroff is the associate director for US passive strategies for Morningstar.

Thanks for joining me, Dan.

Dan Sotiroff: You’re very welcome. It’s good to be back.

Hampton: We’re going to talk about some bond ETFs that camp out at the riskier end of the fixed-income range. Let’s start with multisector. What are these investments? What do they invest in and for how long?

Sotiroff: So, not exactly like a household name. We think of our core bond ETFs as being the big ones out there, and they are. Those are some of the largest bond ETFs out there. So multisector is a little bit different. They’re a lot more different than a lot of these categories we’ve been talking about throughout the year. They’re very active. I think of this category as really sort of a collection of strategies rather than representative of an asset class or a segment of the market. There’s going to be very few index-tracking options, and it’s a very active category. It lends itself well to active management. Lots of differentiation across how active managers can actually build a portfolio in this. But the common thread is they all invest in bonds from a range of sectors, hence the name multisector. It’s self-explanatory in that regard.

That includes things like high-yield corporate bonds, investment-grade corporate bonds, asset-backed securities, mortgage-backed securities, government bonds, and then they can mix and reweight those sectors in various ways to get the outcome. And they’re usually shooting for a higher rate of return than sort of a broad bond market index. You’ll often see the name “income” associated with these types of bond ETFs. That’s kind of the attraction. They have higher yields, and it’s more of an income-sort-of bond ETF, if you want to put it that way. But suffice to say there are a lot of moving parts to these ETFs. They’re very active. The goal is always to outperform in that regard, and that means higher yields than what you’re going to get with a core bond ETF. So, think of those things when you think multisector.

Hampton: How do high-yield bond ETFs differ from multisector?

Sotiroff: Let’s maybe start with how they’re similar. They’re going to have a higher yield than the broader bond market in a lot of cases, and the yields sometimes are kind of similar. Multisector maybe has a slightly lower yield than a dedicated high-yield bond ETF, but it’s the same sort of thing. The income angle is the attraction here between the two of them. What’s different about high-yield bond funds is they’re really dedicated just mainly to the high-yield sector. That’s one segment or sector of the bond market, and they’re really going to focus on that, whereas multisector can go and branch off, and they can get into some other sectors to achieve various goals, maybe reduce risk a little bit more, aim for a higher yield, or some combination of the two things. But that’s really the big difference is one, high yield is really dedicated to the high-yield sector specifically.

Hampton: These investments offer higher yields but come with a number of risks. Can you explain what they are and whether the risks are rising or declining in the current environment?

Sotiroff: The higher yields and the higher returns are not free, so there is higher risk here. Suffice to say both tend to be a little bit less sensitive to interest rate changes, so they’re not going to move as much when the Fed increases or decreases interest rates as maybe like a core bond ETF. Their durations tend to be a little bit lower. The bonds they hold tend to have a little bit lower maturities associated with them. Where they make up for that, where the risk comes from, is probably going to be more on the credit side of things. They’re probably going to be holding more of the riskier credit-type bonds out there. High yield, definitely. I mean, by definition, it’s all high-yield bonds. Multisector, you’re going to have some high-yield bonds and maybe some other bonds that land in the lower rungs of the investment-grade credit-rating spectrum.

To bring it back to where we’re at today, spreads are pretty tight by historical standards right now. So, just be aware that if you’re getting into these ETFs, there is some downside risk if something were to come along and cause spreads to widen out. That’s really the risk with these ETFs is when spreads widen out, they’re probably going to decline in value. But that’s just what comes with the territory. That’s where the risk is, and you just have to be aware of that if you’re looking to get into one of them.

Hampton: What makes passive and active multisector and high-yield bond ETFs similar and different?

Sotiroff: It’s the same story that we see in just about any other stock or bond category. Passive is typically, though not always, trying to just represent a sector of the market or the market as a whole. Active is trying to outperform the market or a segment of the market. Let’s start with high-yield bond ETFs. They kind of come in both flavors. You can get index-tracking options, you can get actively managed options. I think it’s worth mentioning when you start looking at the high-yield bond category that active managers actually have pretty good hit rates there. They actually do tend to outperform an average of their passively managed peers, per our Active/Passive Barometer there. I think the hit rate is around 50%, which is pretty high compared to some of the stock categories that we look at. Multisector is a little bit different.

Like I said before, this is a very, very active category, so there aren’t really a whole lot of passively managed peers you can really benchmark to. And there’s really a broad range of strategies that are applied there. So, there really is no market for a passive index fund to really track, although we do have some of the more active index funds if you want to mix terms up there that are in that category, but there aren’t many of them. They’re few and far between.

Hampton: Talk about the performance of these ETFs in 2026. How do they compare to the broader bond market?

Sotiroff: So, again, multisector, there’s a wide range of strategies there. What we saw so far this year, and this is through Nov. 6, I should say, so we’re including the volatility that we saw in that first week of November. The median multisector fund is up about 1% this year. But again, the breadth of strategies that you see in the category, there’s a lot of dispersion in how we get to that 1% median. The best-performing fund was up about 7% this year. The worst-performing fund was down about 7% this year. So there’s a really wide range of outcomes that you probably could have experienced depending on the ETF you were in. And it’s actually very similar for high-yield bond ETFs as well. So the median was up about 1% this year through Nov. 6. The worst performer—I got to check my numbers here—was down about 6.5% over that period. The best performer was up about 5.5%. So again, you see a pretty wide dispersion there, but again, that’s a very active category when you get into high-yield bonds as well. It’s just more focused on that specific segment of the bond market.

Hampton: At the top of the show, I mentioned how much money flowed into these investments, but I really do think it’s important that we get to hear that from you. How much money has flowed into these bond ETFs this year, and what does that tell you, Dan?

Sotiroff: I think the numbers I gave you, I’ve got them in front of me here. Multisector bond ETFs took in about $25 billion; high-yield bond ETFs took in around $6.7 billion. That was through the first 10 months of the year, so end of October. Why is that happening? The simple answer, I think, is a lot of investors are looking for income. In particular, high-yield and multisector kind of cater to that because they are sort of a higher-yielding asset, in general. So there’s obviously just that attraction from certain types of investors. Maybe they’re getting close to retirement, or they’re in retirement, and they want some income-producing assets. We’ve seen that trend emerge. We’ve talked about other things like covered-call ETFs and whatnot and various ways you can kind of play income, but these are one of them. I think there’s that there.

The other thing is just the bigger trend we’re seeing go on within ETFs and mutual funds, and you’re seeing a lot of money move out of mutual funds and going into ETFs because they’re more tax-efficient. That trend has certainly carried over into fixed income as well. Although the ETF doesn’t lend as many of the tax efficiencies to bonds, you’re still seeing it. Investors are clearly preferring ETFs. And so bond ETFs in either of these categories, the multisector and high-yield categories, are clearly benefiting from that broader trend that we’re seeing take place. I think it’s probably a combination of those two things and maybe some other things at the margins.

Hampton: How can investors use these bond ETFs to diversify their portfolio, and what’s the ideal amount to represent the fixed-income part?

Sotiroff: Yeah, so I don’t know if I can answer an ideal part because it’s going to vary based on your circumstances and what you’re trying to achieve. That’s always a tricky question to answer, so I’m going to dodge it. But I would say this: You have to be very careful with these two categories because they tend to be a little bit more correlated with the stock market. That’s where the credit risk comes in. So, when the market is down, they have a pretty good chance of also being down, maybe not as much as the stock market, but they’re not going to protect you during a really significant drawdown.

That said, there is a little bit of difference between them. The high-yield bond ETFs are probably going to be more correlated with the stock market than maybe a multisector fund. So, the multisector thing, you get a little bit of diversification across different sectors that can lower your correlations to the broader stock market. So, you get a little bit of an advantage here, but again, these aren’t going to behave like a Treasury fund, or maybe a core bond ETF or something like that where you’re looking for some downside protection if we were to go into a major economic downturn or the market were to take a significant stumble over an extended period of time. And that just gets back to the risk/reward that you’re seeking. The higher yield does come with risks, so it may not have shown up yet, but it’s there, and you do need to be aware of it.

Hampton: Are they considered a short-term, intermediate-term, or a long-term investment?

Sotiroff: We should only be looking at these as long-term. You should only be looking at these as a strategic position that you’re using to supplement maybe something else. Maybe you’ve got a core bond ETF, and you want to get a little bit more income out of it. Multisector and high yield are great complements to that. That’s really how I would be using them. Again, I probably would not be putting my entire bond allocation into a high-yield bond ETF, but I understand there is an attraction to them because they do throw off incremental income.

Hampton: Our audience is likely curious about which multisector bond ETFs earn a Gold or Silver rating for Morningstar. What are they?

Sotiroff: Let’s start with the multisector bond ETFs. Like I said, I’ve been saying over and over again, very, very active category, not a lot of passive options in the category. We don’t rate any of the passive options in the category. So, the options I’m going to give you here are really actively managed, and we had a few of them. Hartford Strategic Income ETF. The ticker is HFSI. It’s priced at around 49 basis points right now. The analysts that are rating these, they really like the team and the process behind it, and that ends up with a Gold rating. The other one, and I’ve actually called this one out before, JPMorgan income ETF, JPIE, that’s charging 39 basis points.

And then I’ll just mention the Vanguard one here. It’s relatively new, but I know we have a lot of listeners that love Vanguard. Vanguard created a multisector income bond ETF recently. The ticker is VGMS. That’s charging 30 basis points. It’s one of the cheapest options in the category, and that actually ends up with a Silver rating on it. So, it’s something to keep in mind. We’ve recently rated it. It’s still relatively new. It’s gaining assets, but something to keep an eye on if you’re a Vanguard fan and you’re looking for an option out there.

Hampton: And what about high-yield bond ETFs that your team likes?

Sotiroff: We have a couple of index options. These aren’t going to be Gold- or Silver-rated. The highest of the index-tracking options tend to end up being rated Bronze. And again, that goes back to the fact that a lot of active managers do have advantages in this category. Two of them that we’ve really liked for a while: JPMorgan BetaBuilders USD High Yield Corporate Bond ETF. The ticker is BBHY. That’s charging 7 basis points. Again, it’s a Bronze-rated ETF. The other broad index-tracking option out there right now that we rate is iShares Broad USD High Yield Corporate Bond ETF. The ticker is USHY. That’s charging 8 basis points. A basis point more; it’s not much of a difference in fees. It also comes out of Bronze.

On the active side, we’re actually not rating a lot of high-yield bond ETFs that are actively managed at the moment. One that we do like is Franklin High Yield Corporate ETF. The ticker is FLHY. That’s charging 40 basis points and gets a Gold rating. Our fixed-income team is looking at several others in the category that they do want to rate in the coming year, so that may change in the near term. I’m not going to really say any more about that, but there are some other options out there that I think look attractive based on just their processes and their fees. So, more to come on that in the next year.

Hampton: And what’s the takeaway for income investors on multisector and high-yield bond ETFs?

Sotiroff: I think the basics are the ETFs in both of these categories have higher yields. That’s sort of the attraction, but just be aware that they’re also riskier. They’re probably not going to diversify you as a dedicated Treasury ETF or a broad bond market ETF or something along those lines. Active managers specifically can do very well in either category. So, you really need to do your homework. Pay attention to fees. And above all, anytime you get into active management, be picky who you go with because you do need to be invested with them for a long time to really see the advantages of their processes play out.

Hampton: Thanks, Dan, for coming to the table and discussing multisector and high-yield bond ETFs.

Sotiroff: Sure thing. You’re very welcome.

Hampton: That wraps up this week’s episode. Thanks for making this show part of your day. A couple of reminders: Give Investing Insights five stars on Apple Podcasts to help others find the work we’re producing for you, and subscribe to Morningstar’s YouTube channel to watch new videos from our team. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jess Bebel. I’m Ivanna Hampton, editorial multimedia manager at Morningstar. Take care.