HYG's Dominance in High-Yield Bond ETFs: Cost, Liquidity, and Risk in Focus

The high-yield bond ETF space has grown increasingly competitive, with newer, low-cost rivals like the SPDR Portfolio High Yield Bond ETF (SPHY) and JPMorgan BetaBuilders USD High Yield Corporate Bond ETF (BBHY) challenging the long-reigning iShares iBoxx High Yield Corporate Bond ETF (HYG). While these newcomers boast rock-bottom expense ratios, HYG's entrenched liquidity, diversified holdings, and proven track record argue for its continued role as a core portfolio staple. Here's how it holds its own—and why investors shouldn't abandon it yet.

Expense Ratios: A Numbers Game with Nuanced Trade-offs

The cost advantage of SPHY and BBHY is undeniable. SPHY's 0.05% expense ratio is seven times cheaper than HYG's 0.49%, while BBHY charges 0.07%. Over time, these savings can compound significantly. However, expense ratios alone don't tell the whole story. HYG's scale—$17.17 billion in assets under management (AUM) versus SPHY's $8.76 billion and BBHY's $595 million—creates economies of scale that newer funds can't match. For instance, larger AUM often translates to tighter bid-ask spreads and smoother liquidity, which are critical in volatile markets.

Liquidity: Why HYG's Size Matters

Liquidity is where HYG truly shines. While SPHY's average daily trading volume of ~1.3 million shares (as of April 2025) is robust, HYG's dominance in the space—accounting for ~40% of all high-yield ETF assets—likely ensures even greater secondary market activity. SPHY's bid-ask spread of 0.04% is tight, but HYG's market depth (the number of shares available at or near the quoted price) is likely superior, reducing execution risk for large trades.

BBHY, by contrast, has a wider bid-ask spread of 1.08% and smaller AUM, which could lead to slippage during sudden market moves. For investors prioritizing seamless trading—especially in turbulent environments—HYG's liquidity edge remains unmatched.

Risk-Adjusted Returns: Yield vs. Volatility

HYG's yield-to-worst of 7.16% (as of July 2025) sits comfortably above BBHY's and SPHY's, reflecting its broader exposure to the high-yield market. While newer ETFs aim to minimize costs, they may sacrifice yield or diversification. HYG holds over 1,300 bonds, spreading risk across industries and issuers, whereas SPHY holds ~472. This diversification helps mitigate defaults' impact, a critical factor in high-yield investing.

Volatility metrics also favor HYG. BBHY's 20-day volatility of 2.85% and HYG's 3.41% are comparable, but HYG's longer track record and active index management (tracking the Markit iBoxx USD Liquid High Yield Index) provide a smoother ride over market cycles.

The Case for HYG as a Core Holding

HYG's strengths align with its role as a foundational high-yield ETF:
1. Liquidity for All Seasons: Its vast AUM and trading volume make it a go-to for institutional and retail investors alike, ensuring minimal slippage even during sell-offs.
2. Diversification at Scale: 1,300+ holdings reduce idiosyncratic risk, a must in a credit-sensitive environment.
3. Yield with Modest Risk: Its 3.04-year duration and 328-basis-point spread over Treasuries balance income potential with manageable interest-rate sensitivity.

While SPHY and BBHY offer cost savings, their smaller sizes and narrower holdings may not replicate HYG's ability to withstand credit events. For most portfolios, HYG's role as a stable, liquid income source remains irreplaceable.

Investment Strategy: HYG as the Anchor, Others as Supplements

Recommendation:
- Core Allocation: Maintain HYG as the primary high-yield exposure. Its liquidity and diversification justify the higher expense ratio, especially for long-term holders.
- Satellite Positions: Use SPHY or BBHY for incremental yield or cost-conscious rebalancing. Their lower fees make them ideal for smaller allocations or taxable accounts.

Risk Considerations:
- High-yield bonds are sensitive to economic downturns. Monitor credit spreads and defaults closely.
- HYG's higher expense ratio will erode returns over time, so pair it with low-cost fixed-income ETFs elsewhere in the portfolio.

Conclusion

In a world of cheaper alternatives, HYG's enduring appeal lies in its liquidity, diversification, and proven resilience. While SPHY and BBHY are compelling for cost-conscious investors, they lack the scale and market depth to replace HYG as a core holding. For portfolios seeking reliable high-yield income with minimal execution risk, HYG remains the gold standard—a position it's earned through decades of performance.