High-yield bonds behave more like stocks than investment-grade bonds. These bonds have significant holdings in smaller companies and are considered to have a weaker financial condition but benefit as the economy moves north.
Although high-yield bonds are more exposed to credit risk, these have less exposure to interest rate risk, making them a differentiated source of return. Despite the headwinds faced during the Fed’s tightening of monetary policy, with indications coming in from the Fed that it might slow down its steep rate of hikes, these bonds are poised to grow.
Below, we share with you three top-ranked high-yield bond mutual funds, viz., Fidelity Capital & Income Fund FAGIX, T. Rowe Price Floating Rate Fund PAFRX and American Funds American High-Income Trust AHITX. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of funds.
Fidelity Capital & Income Fund seeks to provide income and capital growth. FAGIX invests mainly in equity and debt securities, including defaulted securities, with an emphasis on lower-quality debt securities.
Fidelity Capital & Income Fund has three-year annualized returns of 7.3%. FAGIX has an expense ratio of 0.68% compared with the category average of 0.95%.
T. Rowe Price Floating Rate Fund invests most of its assets in floating-rate loans and floating-rate debt securities, wherein floating-rate loans represent amounts borrowed by companies or other entities from banks and other lenders. PAFRX advisors invest mostly in funds that are below investment grade or junk or unrated securities.
T. Rowe Price Floating Rate Fund has three-year annualized returns of 5.1%. As of the end of February 2023, PAFRX held 51.7% of its net assets in miscellaneous bonds.
American Funds American High-Income Trust seeks a high level of current income, with capital appreciation as a secondary goal. AHITX invests in high-yield, high-risk bonds and other similar securities, including preferred stocks, common stocks and equity-related securities.
American Funds American High-Income Trust has three-year annualized returns of 4.9%. Tara L. Torrens, has been one of the fund managers of AHITX since May 2015.
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