Xtrackers USD High Yield Corporate Bond ETF (HYLB)

HYLB is an exchange-traded fund that holds a diversified portfolio of high-yield (speculative-grade) corporate bonds denominated in US dollars, tracking a broad index of junk-bond issuers and providing exposure to credit-spread movements across sectors and industries.

The composition of the high-yield bond market

High-yield corporate bonds come from companies rated below investment grade — typically companies rated BB and below by Standard & Poor’s or Moody’s, though the exact cutoff can vary slightly. These are real operating companies borrowing money; they just have enough financial risk (high leverage, shaky profitability, or uncertain futures) that investors demand substantially higher yields than they would for investment-grade debt. The current-yield advantage is real: a five-year junk bond might yield several percentage points more than a five-year Treasury bond, compensating investors for the higher probability that the borrower defaults.

HYLB’s portfolio spans the universe of such issuers. The index it tracks includes hundreds of bonds across dozens of industries and dozens of issuers, each position sized roughly in proportion to the amount of that bond outstanding in public markets. A large, stable junk-rated company like an auto-parts maker or a telecom tower company gets a larger position than a smaller, higher-risk credit. This market-cap-weighted approach means HYLB’s portfolio shapes itself to wherever capital markets are issuing junk debt.

Sector and industry distribution

The high-yield universe has rotated over decades. In the 1980s, most junk bonds came from corporate raiders and highly leveraged buyouts. Through the 1990s and 2000s, telecommunications, auto suppliers, and retailers dominated. By the 2020s, the composition reflected the changing economy: energy exploration and production companies funding upstream projects, healthcare companies funding acquisitions, software and services companies funded by private equity, and real-estate-backed issuers funding development and refinancing. Any year’s HYLB holdings will be tilted toward whoever needed to borrow large amounts at high yield at that moment.

The diversity across sectors is a feature, not a bug. Holding one company’s debt is terrifying; that company might default. Holding five hundred companies’ bonds spreads that risk. When one industry suffers (airline defaults during a pandemic, retailers during a shift to e-commerce), others thrive, and the portfolio’s overall default rate is far lower than any single issuer’s probability of default. This is why a broad index approach to junk bonds works better than picking single high-yield credits.

Duration and interest-rate sensitivity

High-yield bonds, like all bonds, fall in price when interest rates rise. A bond issued yesterday at 7% yield looks worse tomorrow if a new bond can be issued at 8% yield; the old bond is worth less because buyers can now get better yield elsewhere. The magnitude of that decline depends on the bond’s duration — how long until it matures — and the size of the rate move. HYLB’s duration is typically moderate, shorter than a typical investment-grade bond portfolio because junk-rated companies often issue shorter-maturity bonds (lenders want to take their profits and exit faster). This moderate duration means HYLB will lose value when rates rise, but not as much as a longer-duration portfolio would.

The flip side is that HYLB gains when rates fall. In the 2020–2022 period when the Federal Reserve slashed rates, junk bonds rallied sharply because both rates and credit spreads compressed. In contrast, when rates are rising and credit spreads are widening simultaneously (as they were in 2022), junk bonds can have terrible returns, suffering from both headwinds.

Credit risk and default expectations

The universe of high-yield bonds is a cross-section of what economists call sub-investment-grade risk. In normal times, annual default rates on junk bonds run 1 to 3 percent, meaning in a typical year a couple of the five hundred companies HYLB holds will default. During recessions or credit crunches, default rates spike to five percent or higher. An investor holding HYLB for five years should expect at least a couple of defaults along the way, but recoveries are often partial and borrowed time (some companies default, bondholders recover 30 to 80 cents on the dollar, and the fund’s value declines). In a severe recession, HYLB could see a major drawdown as default rates spike and investors demand wider spreads on remaining issuers.

The index rebalances regularly, removing companies as they’re upgraded out of high-yield or downgraded further, and adding new issuers. This means HYLB’s portfolio is not a static bag of bonds; it evolves as the high-yield market does.

Research and practical considerations

For investors considering HYLB, the key questions are: What is the fund’s current distribution yield, and how much of that is sustainable? What is the weighted-average credit rating of the portfolio, and how has it trended? In a credit rush, ratings can be inflated; in a credit squeeze, they’re pulled down. Compare HYLB’s expenses (low, in this case) against peer high-yield funds, and examine performance across different market regimes.

Watch the fund’s spread to Treasuries — the gap between junk-bond yields and risk-free yields. Wide spreads (say, six to eight percentage points above Treasuries) suggest the market is fearful and bonds are cheap; narrow spreads (two to three points) suggest confidence and lower expected returns ahead. A reasonable time to own junk bonds is when spreads are wide; a precarious time is when they’ve compressed to historical lows and profit margins on lending have eroded.