Generating a 5.5% Yield in Fixed Income with Minimal Risk: A 2025 Analysis of Preferred Securities, Corporate Bond ETFs, and Diversified Bond Accounts

The pursuit of a 5.5% yield in fixed income while minimizing risk has become a central challenge for investors in 2025, as historically tight credit spreads, elevated starting yields, and evolving macroeconomic conditions reshape the landscape. This analysis evaluates three key asset classes-preferred securities, corporate bond ETFs, and diversified bond accounts-to determine their viability for achieving this target.

Preferred Securities: High Yields with Nuanced Risks

Preferred securities have emerged as a compelling option for income-focused investors. By late 2025, the ICE BofA Fixed Rate Preferred Securities Index reported a yield-to-worst of over 5.5%, while non-financial preferreds, such as those in the VanEck Preferred Securities ex Financials ETF (PFXF), offered current yields of approximately 6.9%-outperforming Treasuries and high-grade corporates. These instruments are predominantly investment-grade, offering a lower volatility profile compared to high-yield debt. However, their risk profile is not without caveats. Preferred securities are sensitive to rising Treasury yields due to their long maturities or perpetual structures, and their average yield spread to high-yield corporate bonds has narrowed to 76 basis points, significantly below historical averages. Investors must also consider sector concentration risks, though diversification across utilities, telecommunications, and other non-financial issuers has improved.

Corporate Bond ETFs: A Spectrum of Yield and Risk

Corporate bond ETFs present a diverse array of options for achieving a 5.5% yield. The Bloomberg US Corporate Bond Index closed 2025 with an average yield of 4.8%, near the upper end of its 15-year range. Specific ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), offer a 5.5% yield but come with elevated risks tied to currency and credit volatility in emerging markets. Conversely, the CARY ETF also provides a 5.5% SEC yield. Investment-grade corporate bonds, with an option-adjusted spread of 74 basis points-the narrowest in 15 years-remain attractive for their stable credit fundamentals and strong earnings. However, tight spreads reduce buffers for risk-adjusted returns, necessitating a defensive posture. High-yield bonds, while offering higher yields, face challenges from rich valuations and dispersion in credit quality, with many trading outside 100 basis points of the index level.

Diversified Bond Accounts: Balancing Yield and Stability

Diversified bond accounts, such as those tracking the Morningstar US Core Bond Index, delivered a 7.12% return in 2025-the highest since 2020. These accounts typically blend investment-grade corporate bonds, Treasuries, and emerging-market debt, offering a balanced approach to yield and risk. For instance, the Morningstar US Corporate Bond Index outperformed the Treasury counterpart by 390 basis points, reflecting strong investor demand and favorable technical conditions. High-yield components within these accounts, while offering elevated yields, require caution due to a trailing 12-month default rate of 5.28%. Emerging-market local-currency bonds, however, have shown improved risk profiles, with lower leverage and default rates compared to their US counterparts. The Federal Reserve's rate-cutting cycle in late 2025 further supported these accounts by steepening the yield curve, benefiting short- and intermediate-duration holdings.

Strategic Recommendations

To achieve a 5.5% yield with minimal risk, investors should adopt a layered strategy:
1. Prioritize Investment-Grade Exposure: Focus on ETFs like CARY or diversified bond accounts with strong credit fundamentals, as these offer yields near 5.5% with lower volatility.
2. Diversify Across Sectors and Geographies: Allocate to non-financial preferred securities (e.g., PFXF) and emerging-market local-currency bonds to mitigate sector-specific risks while enhancing yield.
3. Maintain a Defensive Posture: Given tight credit spreads and event risks (e.g., M&A activity, regulatory shifts), limit exposure to high-yield bonds and prioritize active management for credit selection.

Conclusion

The fixed-income market in late 2025 offers multiple pathways to a 5.5% yield, but achieving this with minimal risk requires careful navigation of credit spreads, duration, and diversification. Preferred securities and investment-grade corporate bond ETFs provide the most direct routes, while diversified bond accounts offer a balanced approach. As the Federal Reserve's policy trajectory remains uncertain, investors must remain agile, favoring quality and liquidity to preserve capital while capturing income.