XHYD's Outperformance in High-Yield Consumer Non-Cyclicals: A Strategic Case for Sector-Specific Income Exposure in a Rising Rate Environment

The market is in a constant tug-of-war between the Fed's tightening grip and investors' hunger for yield. In this environment, sector-specific strategies are gaining traction, and the BondBloxx US High Yield Consumer Non-Cyclicals Sector ETF (XHYD) is proving to be a standout. With a 6.05% distribution yield and a focus on a sector historically insulated from economic downturns, XHYD offers income-focused investors a compelling case for balancing risk and reward in a rising rate world.

The Power of Sector Concentration

XHYD's thesis is simple: capitalize on the resilience of consumer non-cyclicals. This sector, dominated by household names in food, beverages, and utilities, thrives because people need these products and services regardless of the economy. During the 2008 financial crisis, consumer staples outperformed the S&P 500 by 4.2% annually. In 2020, as the pandemic shuttered discretionary sectors, consumer non-cyclicals held steady, with companies like Procter & Gamble and Coca-Cola seeing demand surge.

By concentrating 46.57% of its assets in the top 50 holdings within this sector, XHYD leverages this stability. Unlike broad high-yield ETFs that dabble in volatile sectors like energy or real estate, XHYD's narrow focus amplifies its exposure to companies with predictable cash flows and pricing power. This is a double-edged sword: higher risk in a sector downturn, but lower volatility in a broad market sell-off.

Rising Rates and the Case for High-Yield Junk

The Fed's rate hikes since 2022 have made bonds a battleground. While long-duration treasuries have cratered, high-yield bonds—nicknamed “junk” for their speculative risk—have held up due to their generous coupons. XHYD's 6.05% yield is a stark contrast to the 2.5% offered by the Bloomberg High Yield Index. Why? Because the consumer non-cyclicals sector is less sensitive to interest rates.

Consider the math: when rates rise, bond prices fall, but high-yield bonds with strong fundamentals often outperform. XHYD's holdings, such as Coca-Cola and Unilever, have robust balance sheets and consistent cash flows, making them less likely to default. In fact, the sector's average credit quality is near all-time highs, with default rates at a 10-year low. This makes XHYD a unique hybrid—a high-yield fund that behaves more like an investment-grade bond.

Comparative Edge in a Crowded Space

XHYD isn't the only high-yield ETF on the block, but it's the only one that's this focused on a defensive sector. Take the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which has a 5.5% yield but is diversified across all sectors. While HYG's broad exposure reduces sector-specific risk, it also dilutes the power of consumer non-cyclicals' resilience.

Data from 2022 to 2025 shows XHYD outperforming both HYG and the S&P 500 in annualized returns (6.52% vs. 5.8% vs. 3.2%) while maintaining lower volatility (5.37% vs. 8.6% vs. 12%). This is no accident—it's a product of strategic concentration. By avoiding sectors prone to commodity shocks or regulatory overhauls, XHYD isolates itself from the noise and focuses on the steady drumbeat of consumer spending.

Risks and the Road Ahead

No strategy is perfect. XHYD's non-diversified structure means it's more exposed to individual issuer risks. If a major holding like Kroger or PepsiCo stumbles, the fund's performance will feel the pinch. Additionally, rising rates could pressure bond prices, though the sector's strong credit fundamentals should cushion that blow.

For now, the Fed's pause on rate hikes and the sector's low default risk create a tailwind. With the Fed signaling rates may stay elevated through 2025, XHYD's high yield becomes a key differentiator. Investors seeking income without sacrificing stability should consider allocating 5–10% of their fixed-income portfolios to XHYD.

Final Take

In a world of economic uncertainty, XHYD offers a rare combination of high yield and defensive positioning. Its focus on consumer non-cyclicals—sector-specific, high-cash-flow, and low-volatility—positions it as a strategic tool for income-focused investors. While not without risks, its outperformance in rising rate environments and historical resilience make it a compelling addition to a diversified portfolio.

For those who want to ride the yield train without the turbulence of equities, XHYD is a ticket worth considering. Just don't forget to check the balance sheet—and the sector's staying power—before boarding.