Published Fri, 18 Oct 2019 14:20:00 -0400 on Seeking Alpha
Invesco Fundamental High Yield Corporate Bond ETF (PHB) focuses on corporate bonds that have ratings below investment grades. The ETF tracks the RAFI Bonds U.S. High Yield 1-10 Bond Index. PHB provides exposure to a broad range of U.S. high yield corporate bonds in the B-rated category. In an economic downturn, its fund price may decline due to rising default rates. Since we do not foresee a recession in the near-term, we think it is still safe for investors to hold on to this fund right now.
Data by YCharts
When evaluating bonds, we have a checklist. First, we look at whether the bond is safe or not (credit risk). Second, we look at how well these bonds are impacted by the interest rate (interest rate risk). Third, we look at whether this is the time to buy these bonds or not. So, we will go through this checklist one by one.
High credit risk
High yield corporate bonds are below investment grades bonds. Indeed, most of PHB’s bonds are non-investment grade bonds. As can be seen from the table below, about 83% and 90% of its bonds are non-investment grade bonds rated by S&P and Moody’s respectively.
Source: Invesco Website
These bonds tend to be riskier than investment grade bonds and are much more vulnerable in an economic recession. As can be seen from the chart below, high-yield bond default rate has spiked following the past two recessions in the United States (yellow solid line). In the last... Read more