PHB ETF analysis: juicy yield and high risk. Is it worth it?

High-yield bonds are a favourite prey of many investors. But it's not always a good time for them. Is that the case here? That's what we'll look at in today's analysis.

If you're looking for a high-yield investment opportunity, ETFs like this may be an attractive option for you. In today's article, we look at the Invesco Fundamental High Yield Corporate Bond Portfolio ETF $PHB+0.3%, a fund focused on bonds issued by lower-rated companies. We analyze its returns, management costs and the risks associated with investing in this fund

Basic introduction

The PHB ETF(Invesco Fundamental High Yield Corporate Bond ETF) is an exchange-traded fund that focuses on investing in high-yield bonds issued by companies. This ETF is managed by Invesco and is designed to provide high yield investment and diversification to a bond portfolio.

An analysis of the PHB ETF shows that it is a high yield fund, but it also carries more risk than other bond funds. The fund focuses on bonds issued by lower-rated companies, which increases risk. However, the fund provides investors with higher returns than other bond funds, which may be attractive to investors seeking higher yields.

As of March 2023, the PHB ETF has a total value under management of approximately $2.5 billion and an average annual return of approximately 5.5% over the past five years. The fund also has low management costs, making it a relatively affordable investment opportunity.

It is important to note that an investment in the PHB ETF may involve more risk than other bond funds and that you should carefully evaluate your investment objectives and strategy to determine the suitability of this fund for your portfolio.

PHB focuses primarily on high yield corporate bonds. The fund has achieved positive returns over the long term due to higher yields. However, the credit risk is high, especially in the event of an economic recession, due to a portfolio composed mainly of non-investment grade corporate bonds. Currently, most analysts agree that, given the macroeconomic uncertainties, downside risk appears to outweigh upside potential.

The bond market had a disastrous year in 2022. Treasury and corporate bonds took a beating as the Federal Reserve aggressively raised rates to fight inflation. This had a negative impact on PHBs as well. As you can see from the chart above, the fund has fallen more than 12% since reaching its cyclical peak in the second half of 2021. Even when factoring in the interest earned on bonds, the total return was still negative 7.95%. An important point is that the PHB has an average maturity of 4.84 years. As we know, the longer the duration of a bond, the more sensitive its price is to changes in rates.

Given that the PHB portfolio has an average year to maturity of 4.84 years, its sensitivity to rate changes is moderate. This explains why it is still down 12.89% as of the second half of 2021. Despite this decline, the fund has still delivered positive total returns over the past 10 years.

However, investors should not neglect PHB's downside risk
Although PHB has a much higher yield than other government bond funds, the average credit quality of its portfolio is worse than that of government funds. Only 17% of the bonds in PHB's portfolio are BBB-rated bonds. BBB-rated bonds are the lowest investment grade bonds. The remainder of PHB's portfolio consists of non-investment grade bonds, with BB and B rated bonds making up approximately 67% and 15% of the total portfolio.

Ratings

BBB rating is a rating class for bonds and other financial instruments used by rating agencies such as Standard & Poor's, Moody's and Fitch Ratings. This rating class denotes bonds with an investment grade rating but with a lower quality grade than AAA and AA.

A BBB rating means that the bond is of medium quality and is still considered a relatively stable investment, but there is some risk that the borrower will not be able to repay its debts in full. BBB rated bonds are typically issued by companies that have been in operation for some time and have stable revenues, but may be vulnerable to economic cycles or other factors such as changes in the regulatory environment.

It is important to note that rating agencies issue their ratings based on an analysis of financial ratios and other factors, but their ratings can also be affected by other factors such as political events or changes in the overall economic climate. In any case...

Because non-investment grade bonds have a much higher default rate than investment grade bonds, there is significant risk. Fitch Ratings is forecasting a default rate of 3% ~ 3. 5% for US and Canadian high yield bonds this year. This rate is significantly higher than last year's 1.3%.

In times of economic stress, not only will default rates rise, but market fear will prevail. In such a scenario, the price of high yield bonds can fall significantly. In 2020, we have seen a negative increase in the price of PHB fund due to market fear at the onset of a pandemic.

Although PHBs pay attractive interest rates with higher yields than US Treasury funds, the worst is yet to come. I think there may be significant downside risk in the event of an economic recession. Personally, I would definitely wait for a better entry price.

Competition?

We've covered the principle of ETFs and the current situation. What are some other alternatives that investors can look at? Would you like me to do an analysis on any of them?

There are several ETFs focused on high yield bonds that are very popular among investors. Some of the most popular high yield bond focused ETFs are:

• iShares iBoxx High Yield Corporate Bond ETF $HYG+0.2% - This ETF is managed by BlackRock and offers yields on bonds issued by lower-rated companies.
• SPDR Bloomberg Barclays High Yield Bond ETF $JNK+0.3% - This ETF is managed by State Street Global Advisors and focuses on high yield bonds issued by corporations.
• VanEck Vectors Fallen Angel High Yield Bond ETF $ANGL+0.3% - This ETF is managed by VanEck and focuses on high-yield bonds issued by companies that straddle the line between investment-grade and non-investment-grade.
• iShares Broad USD High Yield Corporate Bond ETF $USHY - This ETF is managed by BlackRock and offers a diversified approach to investing in bonds issued by lower-rated companies.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.