@humblejalopy High yield in a bond ETF comes from high coupons paid by businesses on bonds they issue.
In theory, the more creditworthy an issuer, the lower the interest rate the market will demand from them on their bonds.
So for high yield bonds to work, investors rely on the ability of (ostensibly) less financially secure issuers to pay more in interest, for the privilege of raising capital from issuing debt securities in order to borrow, than is demanded of ‘lower risk’ issuers (like big, well-established, blue chip, main market-listed enterprises).
When bond issuers can’t repay what they’ve borrowed, they can’t repay it. You can’t get blood out a stone (though you can piss a lot of money in legal fees up the wall trying quite easily).
That money invested in the bonds has - at least for the foreseeable future, once a default event has occurred or is thought by the market to be a real possibility - been compromised. There could well be a restructuring, which should hopefully - eventually - alleviate losses ultimately suffered by those exposed. But it may take years or decades for the issuer to recover to a point where they can pay off all or a decent chunk of what they owe.
Or, alternatively, an issuer might just go under; leaving Bondholders as one of a laundry list of creditors in bankruptcy proceedings.
My point is that bonds - especially high yield bonds - are not a sure thing. At all. Far from it. Bonds go wrong. And when they do, it’s a shitshow - usually a pretty expensive one.
Investing in a bond ETF is, ultimately, largely equivalent to lending anything from, say, 25 at the bottom end, through to hundreds, even thousands, of different borrowers. You are - in effect - reliant on these borrowers to preserve your capital and hopefully pay a return as well.
It’s therefore the prospects the corporate issuers of the debt the fund holds have, and how current and potential future conditions may affect their business, that affects whether or not those issuers will be able to pony up for bond investors whenever they’re liable to.
Given this, to better understand whether a bond fund may or may not be a decent home for your money, be careful look past the headline target yield, the ‘A’ rating, the reputation of the investment manager sponsoring the ETF, the general economic sitch. Focus on the issuers of the bonds - who are you exposed to, to what extent, and how does their future capability to make the repayments to Bondholders that support the value of the ETF look?
https://www.ishares.com/uk/individu...-etf?switchLocale=y&siteEntryPassthrough=true
It’s all here - 1181 issuers
