High-Yield Corporate ETFs: Balancing Income Potential and Risk in a Low-Growth World

In a world where global GDP growth is projected to stagnate at 2.9% in 2025 and 2026, investors are increasingly turning to high-yield corporate ETFs to generate income. These funds, which track indices of junk bonds, offer attractive yields in a low-interest-rate environment. However, the current economic climate—marked by tight credit spreads, elevated default rates, and geopolitical uncertainties—demands a nuanced approach to evaluating their risk-adjusted returns.

The Economic Backdrop: A Delicate Equilibrium

The International Monetary Fund (IMF) warns of a “subdued” global growth outlook, with the U.S. economy expected to expand at just 1.1% in 2025. Central banks, including the Federal Reserve, are adopting a cautious stance, with rate cuts delayed until early 2026 due to inflationary pressures from new trade policies. This environment has pushed high-yield bond spreads to historically narrow levels, with the Bloomberg US Corporate High-Yield Bond Index averaging 2.99% as of June 2025. While low spreads reflect investor optimism, they also leave little room for error if economic conditions deteriorate.

High-Yield ETFs: Income Potential vs. Cost Efficiency

Two leading high-yield ETFs, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK), offer distinct trade-offs.

• HYG charges 0.49% in fees and yields 5.77%, with a 12-month return of 9.22%. Its larger size ($17.1 billion AUM) and lower volatility (1.60% standard deviation) make it a safer bet for conservative investors.
• JNK, with a 0.40% expense ratio and a higher yield of 6.59%, returned 8.65% over the same period. However, its slightly higher volatility (1.82% standard deviation) and smaller AUM ($8.16 billion) may appeal more to income-focused investors willing to accept incremental risk.

Both ETFs have outperformed the Bloomberg Aggregate Index, which returned 1.2% in Q2 2025, but their performance diverges in shorter timeframes. For instance, JNK slightly outperformed HYG in 3-month returns (5.06% vs. 4.84%), while HYG edged ahead year-to-date (5.14% vs. 4.86%).

Risk-Adjusted Returns: The Hidden Metric

While yields and returns are critical, risk-adjusted metrics like Sharpe ratios provide a clearer picture of value. The Artisan High Income Fund (APHFX), a mutual fund with a Morningstar Gold rating, exemplifies this balance. With a 10.14% 12-month return and a trailing 10-year information ratio among the top 1% of its category, APHFX demonstrates how active management can enhance risk-adjusted outcomes. Similarly, the Fidelity Capital & Income Fund (FAGIX), with a 12.08% 12-month return and a Sharpe ratio in the top decile, underscores the potential of diversified strategies that blend high-yield bonds with equities.

Navigating the Risks: A Cautionary Lens

Despite their allure, high-yield ETFs are not without pitfalls. The trailing 12-month default rate for sub-investment-grade bonds remains at 4.3%, above historical averages. Moreover, the Federal Reserve's “higher-for-longer” rate stance has flattened the yield curve, reducing the cushion for high-yield bonds in a downturn. Investors must also weigh the impact of protectionist trade policies, which could strain corporate earnings and widen spreads.

Investment Advice: Strategic Allocation in a Low-Growth World

1. Prioritize Quality Over Yield: In a low-spread environment, focus on ETFs or funds with strong credit selection, such as those with exposure to mid-quality high-yield bonds (e.g., American Funds American High-Income Trust).
2. Balance Cost and Risk: JNK's lower expense ratio makes it ideal for income-focused portfolios, while HYG's liquidity and stability suit conservative investors.
3. Diversify Across Strategies: Consider blending high-yield ETFs with active funds like APHFX or FAGIX to enhance risk-adjusted returns.
4. Monitor Macroeconomic Signals: Keep a close eye on Fed policy and trade developments, which could trigger sudden spread widening.

Conclusion

High-yield corporate ETFs remain a compelling tool for income generation in a low-growth economy, but their value hinges on disciplined selection and risk management. While funds like HYG and JNK offer accessible entry points, investors must balance yield, cost, and volatility to navigate the delicate economic landscape. As the IMF warns of persistent downside risks, a strategic, diversified approach will be key to unlocking the full potential of high-yield investing in 2025 and beyond.