John Hancock High Yield ETF (JHHY)

The John Hancock High Yield ETF (JHHY) holds corporate bonds issued by companies across industries and credit qualities, weighted toward those paying higher coupon rates — a fixed-income vehicle for investors prioritizing cash flow over principal safety.

The origins of high-yield bond investing

High-yield bonds, once called “junk bonds,” originated in the 1970s and 1980s as a financing tool for companies that could not access the lowest interest rates. A company with a shaky credit history or an unproven business model would have to pay higher interest rates to borrow. Investment banks and bond investors realized there was an opportunity: by holding dozens or hundreds of these risky bonds, the odds that any single issuer would default was manageable, and the higher interest rates offered attractive returns. Over time, high-yield bonds became a mainstream asset class. Companies use them to finance acquisitions, refinance maturing debt, or fund operations when they lack investment-grade credit ratings.

JHHY emerged in the mid-2010s as part of John Hancock’s (owned by Manulife Financial) suite of fixed-income ETFs. It was built to capture the income potential of high-yield bonds at a lower cost than traditional mutual funds. The fund entered a market already crowded with high-yield bond funds, some of them decades old, but it offered the convenience of ETF trading — shares bought and sold intraday on an exchange — and the simplified fee structure of an ETF rather than a mutual fund.

Building the portfolio: credit and duration

JHHY’s managers must make two critical decisions: which bonds to buy, and for how long. Credit decisions determine which issuers to hold — a mortgage lender in crisis, a growing technology company financed by private equity, a mature casino operator with stable cash flow. The fund typically holds 100 to 400 individual bonds from different companies, sectors, and issuers. This diversification is the core risk-management tool. If one company defaults and the bondholder loses 50 percent of that bond’s value, the impact on the overall fund is minimal if that company represented only 1 percent of assets.

Duration — the average time to maturity of the bonds in the portfolio — is another lever. A portfolio of bonds maturing in 3 to 5 years is shorter-duration and less sensitive to interest-rate movements; one holding bonds maturing in 10 to 15 years is longer-duration and more volatile. JHHY typically maintains a duration of 5 to 7 years, a middle ground that captures income without excessive interest-rate sensitivity. When interest rates rise, longer-duration bonds fall harder in price; when rates fall, they rise more. By staying in the medium range, the fund balances income and stability.

The spread and the trade

High-yield bonds trade on “spread” — the extra interest rate investors demand above risk-free U.S. Treasury bonds. If a Treasury bond yielding 4 percent and a high-yield corporate bond yielding 7 percent, the high-yield bond has a spread of 300 basis points (3 percentage points). That spread compensates the investor for credit risk. In calm markets with low default expectations, spreads narrow — the high-yield bond might yield 6.5 percent, the spread only 250 basis points. In recessions when defaults spike, spreads widen — the same bond might yield 9 percent as investors demand more compensation to hold risky debt.

JHHY’s performance is driven by two forces: the interest income from the bonds’ coupons, and the change in value as credit spreads move. A shareholder in JHHY might receive 4 to 6 percent annually in distributions (the coupon payments), but the net asset value of the shares themselves can rise or fall 5 to 15 percent in a year depending on whether spreads widen or narrow. In a bull year for credit when defaults are rare and risk appetite is high, JHHY could return 12 to 15 percent. In a credit crisis when spreads blow out and some defaults occur, the fund could fall 5 to 10 percent even as coupon income continues.

Historical evolution through market cycles

The financial crisis of 2008 tested high-yield bonds harshly. Many companies defaulted, spreads exploded to 20-30 percent, and funds like JHHY would have experienced significant losses. Investors who held through that crisis eventually recovered as the economy and credit markets mended, but the pain was real. The recovery from 2009 through 2021 was long and generous — a period when credit risk was rewarded handsomely, and high-yield bonds outperformed Treasuries significantly.

The 2022 rate-hiking cycle brought a different challenge: interest rates rose rapidly, which meant the bonds’ fixed coupon payments became less attractive, and the market values of longer-duration bonds fell. JHHY, holding longer-duration high-yield bonds, suffered a down year as spreads widened and rates climbed. This illustrated a key risk: high-yield bonds are not a free lunch. They offer income but expose the investor to both credit risk (the possibility of default) and interest-rate risk (the impact of rising rates on bond prices).

Sectors and issuer types within JHHY

The portfolio tilts toward certain sectors naturally. Leveraged finance — private-equity-backed companies, cable operators, telecom firms — are heavy high-yield borrowers. Energy companies, particularly upstream oil and gas producers, have historically been significant issuers. Retail companies, some consumer firms, and less-creditworthy financial institutions also appear. The fund avoids the very safest bonds (which yield little) and the most distressed bonds (which carry unacceptable default risk).

The ideal JHHY holding is a company with enough cash flow and asset value to service its debt reliably, but a capital structure or business model that makes it too risky for investment-grade ratings. A hotel company with strong cash flow but high leverage; a telecommunications company with stable earnings but debt-heavy financing; a healthcare provider with recurrent revenue but exposure to regulation. These earn high-yield status not because they are likely to fail but because they are levered or exposed to specific risks.

Interest-rate environment and reinvestment

When bonds in the portfolio mature, the fund receives the principal back and must reinvest it. In rising-rate environments, this is positive — money is reinvested into bonds yielding higher rates, so the portfolio’s yield increases over time. In falling-rate environments, it is negative — new bonds yield less, so the portfolio’s income declines even if the old bonds continue paying.

JHHY must also contend with prepayment risk. If interest rates fall, corporate issuers have an incentive to refinance their debt at lower rates, retiring bonds early. If JHHY held a 7 percent bond and rates drop to 4 percent, the issuer will call the bond at par value, and the fund is forced to reinvest at 4 percent — a negative outcome. This is a subtle but real drag on returns in down-rate environments.

Suitability and research

High-yield bonds are not emergency funds or short-term savings vehicles. They are suitable for investors with a time horizon of at least 3 to 5 years who can tolerate volatility and are comfortable with the possibility of short-term losses. The fund’s prospectus outlines the issuer list, the credit ratings of the bonds held, the distribution policy, and the risk factors. Watching credit spreads — are they widening or tightening? — gives an indication of where JHHY is in the credit cycle. In widening-spread environments, the fund faces headwinds; in tightening-spread environments, it benefits from both coupon income and capital gains.