How to Invest in iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) offers a way to earn income from a pool of loans made to public U.S. companies, but that higher yield comes with increased credit risk. Still, it’s far more diversified and generally safer than owning individual high-yield bonds, and it pays income monthly instead of semiannually.

Unlike traditional bonds, HYG trades on an exchange just like a stock, giving you flexibility and liquidity. This ETF is more complex than your average bond fund, so it’s worth taking the time to understand what you’re buying before jumping in, especially for beginner investors.

Overview

What is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)?

HYG is a passively managed exchange-traded fund (ETF) that tracks the Markit iBoxx USD Liquid High Yield Index, which screens for U.S. dollar-denominated corporate bonds rated below investment grade -- meaning below BBB. These are often referred to as high-yield or junk bonds.

The index focuses specifically on liquid issues, meaning bonds that trade frequently and are easier to buy and sell. The fund is well capitalized, with more than $15 billion in assets under management, and has a track record going back to April 2007. It also trades with high liquidity and a tight 0.01% 30-day median bid-ask spread.

How to invest

How to Buy the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

1. Step 1: Open your brokerage app: Log into your brokerage account where you handle your investments.
2. Step 2: Search for the ETF: Enter the ticker or ETF name into the search bar to bring up the ETF's trading page.
3. Step 3: Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this ETF.
4. Step 4: Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
5. Step 5: Submit your order: Confirm the details and submit your buy order.
6. Step 6: Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.

Holdings

Holdings of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

HYG currently holds a broad portfolio of more than 1,272 high-yield corporate bonds.

As of April 15, the average yield to maturity is 8.16%, which estimates the annual return an investor can expect if the bonds are held until they mature.

The weighted average duration is 3.25 years, which measures the fund’s sensitivity to interest rate changes -- a lower duration like this means less price fluctuation when rates shift.

The portfolio features issuers largely from four key sectors: consumer cyclical, consumer staples, communications, and energy.

Maturities range from less than one year to more than 20 years, although most bonds fall within the three- to five-year range.

Credit quality spans from BB to as low as C, with the majority of holdings concentrated in the BB and B rating tiers.

Should I invest?

Should I invest in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)?

HYG can be a useful addition if you’re looking to diversify an income-focused portfolio built around dividend stocks. It’s not as closely correlated with equities, which means it may outperform when stocks face headwinds.

If you trade bonds actively, HYG also gives you a way to express a view on the high-yield segment, and its options chain adds flexibility for hedging or income strategies through calls and puts.

Just keep in mind that this is a non-investment-grade portfolio, so it’s vulnerable to defaults during recessions. HYG can and has lost value during market downturns, so it’s not a low-risk ETF by any means.

Dividends

Does the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) Pay a Dividend?

HYG pays a distribution, not a dividend, like stock ETFs. These distributions come from the interest accrued on the underlying high-yield bonds. It currently offers a 30-day SEC yield of 7.45% and pays out monthly. Keep in mind that these payments are taxed as ordinary income, so they may not be as tax-efficient as qualified dividends.

Expense ratio

What is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)’s Expense Ratio?

HYG has an annual expense ratio of 0.49%, which means about $49 per year on a $10,000 investment. You don’t pay this fee out of pocket -- it’s deducted from the fund’s performance behind the scenes, so both the yield and total return you see already reflect it. While that’s higher than most bond ETFs, it’s not unusual for high-yield bond funds.

Historical performance

Historical Performance of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Looking at HYG’s historical annualized returns over different trailing periods can help you understand how it has performed through various market environments. All figures reflect total returns with reinvested distributions.

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The bottom line

HYG can serve two purposes. First, it works as a long-term, buy-and-hold component of an income-oriented portfolio, complementing dividend stocks, real estate investment trusts (REITs), and other yield-focused assets. You get monthly distributions sourced from a pool of higher-risk loans to public companies.

The second use case is more tactical. Thanks to its high liquidity, strong daily trading volume, and available options chain, HYG is often used for active trading, speculation, or hedging in the high-yield bond market.

Either way, you need to understand the principal risk that comes with this ETF. Because it holds non-investment grade debt, there is meaningful credit risk -- some of the bonds in the fund could default. During a recession or credit crunch, HYG’s price can decline sharply as spreads widen and investor sentiment shifts.

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