Warning: 3 High-Yield ETFs That Could Plunge By Next Year

Why High-Yield ETFs Are Vulnerable

High-yield ETFs, such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares Preferred and Income Securities ETF (PFF), and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), are often sensitive to high Treasury yields and market shocks. This is because Treasury yields are considered a "safe" benchmark, and when they rise, it can make other high-yield investments look less attractive.

For example, HYG owns the debt of companies with below-investment-grade credit ratings, which means it owns junk bonds. While it offers a 5.99% dividend yield and monthly payout frequency, its yield is starting to fall short as Treasury yields climb back to near record highs. This makes HYG a riskier investment, especially considering the debt inside the ETF is issued by companies with weak balance sheets and heavy debt loads.

The Risks Associated with HYG

Almost 40% of HYG's portfolio is rated B or worse, and the expense ratio is 0.49%, which is much higher than what you'd pay for a Treasury ETF like TLT (NASDAQ:TLT). TLT charges just 0.15%. This makes HYG a less attractive option, especially if you're not confident that the economy will continue to run hot with no recession in sight.

The Similarities between HYG and PFF

PFF is essentially cut from the same cloth as HYG. It owns preferred shares, which are deeply subordinated debt with fixed dividends and limited capital appreciation. While PFF pays monthly and yields 5.41%, its expense ratio is 0.45%. This makes it a less attractive option, especially considering that preferred stocks can go down significantly during a recession.

The Risks Associated with JEPQ

JEPQ is an ETF that turns the market's volatility into income, but it's essentially built for a nonstop uptrend that goes on for years. However, the moment things normalize, it can prove devastating for your portfolio. This is because JEPQ gives you "exposure" to the same stocks you hold in your growth portfolio, which is the wrong place to put it due to its growth holdings.

Additionally, JEPQ has gotten popular only in the past few years, and its past performance is not a guarantee of future success. If growth stocks correct by even 15-20% from here, an ETF like JEPQ would take much longer to recover because of its capped upside.

What to Watch Next

As the economy continues to navigate uncertain waters, investors should be cautious when it comes to high-yield ETFs. While they may offer attractive yields, they can also be riskier investments, especially in a rising interest rate environment. It's essential to reevaluate your portfolio and consider dumping certain high-yield ETFs that could plunge in value by next year.

Investors should also consider diversifying their portfolios and exploring alternative investment options that are less sensitive to market shocks. By doing so, they can minimize their risk and maximize their returns in a rapidly changing economic landscape.

Conclusion

The current economic landscape is marked by rising Treasury yields and a potential recession on the horizon. As a result, investors are being advised to reevaluate their portfolios and consider dumping certain high-yield ETFs that could plunge in value by next year. By understanding the risks associated with these ETFs and exploring alternative investment options, investors can minimize their risk and maximize their returns in a rapidly changing economic landscape.