Smart High Yield Bonds Fund Selection for Risk-Conscious Investors

For many individual investors, navigating the bond market can feel overwhelming. While high-quality government and corporate bonds offer safety, they often provide modest returns in today’s economic environment. Here’s where high yield bonds come into play. These below-investment-grade securities—often called junk bonds—can deliver significantly better returns when selected through professionally managed mutual funds. The key advantage is that fund structures provide diversification that reduces portfolio risk while capturing the superior yields that speculative-grade bonds offer. Unlike individual bonds, mutual funds hold dozens or even hundreds of securities, which naturally mitigates concentration risk.

Why High Yield Bonds Matter for Your Portfolio

High yield bonds have several distinct characteristics that make them attractive for investors seeking better returns. First, because their yields are substantially higher than investment-grade securities, they carry less sensitivity to interest rate changes. When rates rise, high-quality bonds suffer larger price declines, but high yield bonds’ superior income streams provide a cushion. Second, these funds often employ sophisticated strategies using derivatives, convertible securities, warrants, and structured instruments to enhance returns. Third, a diversified high yield bonds portfolio can significantly reduce the default risk that comes with holding individual speculative-grade securities.

The Zacks Investment Research team has identified three standout options that have earned the firm’s top ranking (#1 Strong Buy) and demonstrate strong potential to outperform their peer groups in coming years.

Comparing Three Top-Performing High Yield Bond Funds

PIMCO High Yield Spectrum (PHSAX) leads the group with the strongest three-year annualized return of 10.1%. This fund takes an active approach to high yield bonds investing, maintaining approximately 71% of net assets in miscellaneous bond holdings while tactically deploying the remainder in derivatives such as credit default swaps and total return swaps. PHSAX advisors also utilize convertibles, warrants, and forward agreements to optimize returns across credit cycles.

Nuveen High Yield Income Fund (NCOAX) takes a complementary approach, focusing on below-investment-grade debt instruments from both U.S. domestic companies and foreign issuers. The fund maintains flexibility to invest in unrated bonds when managers believe they offer comparable quality to rated securities. With a three-year annualized return of 9.9% and an expense ratio of 1%, NCOAX appeals to investors prioritizing cost efficiency within the high yield bonds category.

Manning & Napier High Yield Bond Series (MNHYX), managed by Scott Friedman since March 2021, rounds out the trio with a three-year annualized return of 9.8%. This fund constructs its high yield bonds portfolio using diverse instruments including exchange-traded funds (ETFs), bank loans, and emerging market fixed-income securities denominated in U.S. dollars. The flexibility to access different market segments while maintaining a high yield bond focus provides additional diversification benefits.

Making Your High Yield Bonds Investment Decision

All three funds have demonstrated the ability to generate competitive returns while managing risk through diversification and professional management. Your choice should depend on several factors: PHSAX suits investors who want the highest potential return and are comfortable with sophisticated derivative strategies; NCOAX appeals to cost-conscious investors who value simplicity and low fees; and MNHYX attracts those seeking maximum diversification through alternative instruments like bank loans and emerging market bonds.

High yield bonds mutual funds remain an excellent option for investors seeking better income than traditional bonds while managing risk through professional oversight and portfolio diversification. The Zacks #1 rankings suggest these three funds are well-positioned to continue delivering attractive risk-adjusted returns in the years ahead.