Fixed income

High-yield bonds

Higher return potential in your fixed income portfolio. 

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Overview

High-yield bonds: Returns, risks, and portfolio considerations

High-yield bonds play a distinct role in fixed income investing by offering higher income potential in exchange for elevated risk.

Historically, high-yield bonds have been considered risky investments that may not always be adequately compensated, often referred to as “junk bonds.” However, as markets have evolved and use of private credit by issuers has increased, the public high-yield market is now composed of relatively higher-quality issuers than in the past. This shift presents an opportunity to offer more value to clients who are comfortable taking on modest additional risk.  

When used thoughtfully within a diversified portfolio, high-yield bonds can serve as an income enhancer, a complement to core fixed income, or a more defensive substitute for certain equity exposures.


High Yield’s difference

What sets high-yield bonds apart

High-yield bonds are issued by companies with growth potential but lower credit ratings, often due to leverage, industry cyclicality, or transitional business models. Because investors take on more credit risk, these bonds typically offer higher yields.

But a hallmark of high yield is its unique behavior within fixed income investing:

 

Income resilience

The high current yield provides a buffer against price volatility.

Equity-like upside

In favorable economic environments, improving fundamentals can drive both price appreciation and spread tightening.    

Diversification value

High-yield bonds low correlation to government and investment-grade bonds1 enhances portfolio efficiency.

Enhancing income potential

In a low-yield environment, high-yield bonds offer a compelling opportunity to boost portfolio income. To compensate investors for taking on additional credit risk, the yield premium is often significantly higher than that of investment-grade bonds.

Over full market cycles, income has historically been an important contributor to high-yield investing returns. That steady income stream can help cushion the impact of price swings and contribute to more consistent long-term outcomes.

 

Risks that may affect performance

High-yield bonds require careful management because the credit and liquidity risk is higher compared to investment-grade or government bond markets.

Because high-yield issuers often operate in cyclical industries and may lack financial resilience to weather volatility, these bonds do tend to be more sensitive to economic conditions. And while they’re generally less sensitive to rate changes than longer-duration bonds, high-yield securities are not immune, particularly when rate hikes coincide with economic slowdowns.

These risks do require careful consideration. However, these bonds aren’t the “junk bonds” of 2008. The quality of the market has shifted, and the higher relative quality could mean less risk for investors.

High-yield market shifts for higher quality credit and less risk

A chart plots cumulative returns of the ICE 2025 Maturity US Corporate Constrained Index over the 10-year period from 2016 through 2025. It also depicts the declining duration risk as the portfolio nears its end-2025 maturity. Cumulative returns rose steadily over the 10-year period from flat to around 45% higher at the end of the decade. Duration fell steadily over the decade from a starting point at about eight years to about zero at the time of final portfolio maturity.

Sources: Bloomberg data, as of March 31, 2026.


Strategy

Evaluating high-yield allocations

These bonds typically offer higher yields to compensate for greater credit risk. They may appeal to investors seeking more income than traditional bond allocations can provide, as well as those looking to complement equity holdings with a return source grounded in credit fundamentals rather than stock market performance.

Because high‑yield bonds are more sensitive to issuer quality and economic conditions than investment‑grade fixed income, advisors access high-yield exposure is an important consideration.

Choose your approach

Different management approaches, such as actively selecting issuers versus tracking a broad market index, can influence how risks are balanced, how opportunities are pursued, and how high yield behaves within a broader portfolio.

An indexed fund might provide the broad beta exposure you’re looking for. But if you’re looking for potential alpha from a team that’s constantly seeking to identify mispriced market segments or bonds to potentially generate excess returns, then you’ll want to consider an actively managed bond fund.

Indexed ETFs

Aimed to reflect the overall performance and risk characteristics of the asset class. Offer a systematic way to participate in high‑yield credit through rules‑based index exposure.

VCHY

Active ETFs

Active managers seek to identify issuers with attractive risk-adjusted return potential and manage allocations as market conditions evolve. Focused on navigating credit risk and dispersion within the high-yield market.

VGHY

Active mutual funds

More conservative, actively managed high-yield holdings with flexibility across issuers and sectors. Designed to emphasize risk management and income consistency.

VWEHX

Use cases

Diversifying with high-yield bond funds

High‑yield bonds can play different roles depending on investor goals, either enhancing income within fixed income or contributing to diversification across the broader portfolio.

 

Use case no. 1:  Support income needs within fixed income

For income-focused clients (often retirees or those approaching retirement), high yield can increase portfolio income when traditional fixed income no longer provides sufficient yield without increasing equity holdings.

Used as a supplement to core bond allocations, high yield offers higher income potential than Treasuries or investment-grade bonds. While this approach involves accepting additional credit risk, it allows advisors to address income shortfalls while keeping the allocation firmly within fixed income, rather than relying more heavily on equities or portfolio withdrawals.

Use case no. 2: Seek incremental return without full equity risk 

For investors who find core fixed income too conservative but are unwilling to take on the full volatility of equities, high yield provides incremental return potential, but within a more controlled risk framework.

In this context, high yield is used as a return‑enhancing allocation that sits between traditional bonds and stocks on the risk‑return spectrum. Rather than increasing equity holdings, advisors can introduce credit risk to pursue higher expected total return, while keeping portfolio risk aligned with client comfort levels. Income is a secondary benefit; the primary goal is to improve return potential relative to core fixed income.

Use case no. 3: Diversify interest-rate exposure within a bond portfolio 

For portfolios with significant fixed income allocations, high yield can be used as a portfolio construction tool to diversify sources of risk and return. Many traditional bond portfolios are heavily driven by interest‑rate movements, which can lead to highly correlated performance across holdings.

Because high-yield returns are influenced more by credit conditions and issuer fundamentals than by changes in rates, adding high yield can help diversify interest rate exposure within fixed income. In this case, the goal is not to get the most yield or get the most return. It is to create a more balanced bond allocation with different performance factors and better resilience at different rates.

Why Vanguard

How our team seeks quality in high-yield bond funds

At Vanguard, we are dedicated to bringing high quality and low costs to high-yield investing. The asset class is defined by lower credit ratings, but our deep specialization, lower fee hurdle, and expertise allow us to seek mispriced opportunities and focus on quality.

A closer look at the high-yield market

Hear from our fixed income team on how we capitalize on opportunities within the high-yield market.

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Meet the team for active high-yield bonds

More than 200 investment experts in our world-class Fixed Income Group support our active high-yield bond fund management. Our team of portfolio managers use their expertise and rigorous risk management techniques to help you deliver value to your clients.  

 

Our high-yield portfolio managers

Portrait of Michael Chang
Michael Chang
Head of High Yield Portfolio Management, VCM
Portrait of Michael Chang

Michael Chang

Head of High Yield Portfolio Management, VCM
Portrait of Brian Kim
Brian Kim
Senior Manager, Active Credit High Yield
Portrait of Brian Kim

Brian Kim

Senior Manager, Active Credit High Yield

Fund lineup

High-yield bonds from Vanguard

For both aggressive and more conservative high-yield allocations, our funds prioritize capitalizing on income opportunities while mitigating risk. Offering higher income potential at a low cost, our Fixed Income Group offers high-quality bond funds for your portfolio allocations.

Vanguard offers both indexed and actively managed high-yield bond funds. This lets you choose the right amount of exposure and potential return for your client’s portfolio.


Compare & Assess

Where high-yield bonds fit within fixed income allocations

If you’re considering high-yield bond funds for your clients’ portfolios, we offer several resources to review which fund may be the right choice and the potential outcomes of rebalancing.  

Fund comparison tool

Instantly compare funds to evaluate performance, risk, fund characteristics, and fees using current Morningstar data. 

Compare funds

Portfolio analysis

Create and evaluate the fixed income portion of client portfolios. Analyze hypothetical performance risk statistics, country diversification, and asset allocation; compare two portfolios side-by-side; and more.

View fixed income investments

Frequently asked questions

High-yield bond funds may be appropriate when clients seek higher income and can tolerate elevated credit risk. They’re typically considered within a diversified bond allocation when investors are comfortable with greater sensitivity to economic conditions and credit cycles. 

High-yield bonds are issued by companies with lower credit ratings. While they carry higher default risk, they typically offer higher yields.  

A careful review of a client’s overall financial plan and risk capacity should be considered as context for potential returns to determine when incremental yield doesn’t align with a client’s goals for liquidity and volatility risk. 

The higher yield compensates investors for taking on increased credit risk. This “risk premium” reflects the market’s assessment of default likelihood and recovery expectations.  

Credit risk is higher with this kind of investing, and default rates vary by cycle. Over time, however, the high-yield market’s overall credit quality has improved, with a greater share of higher-rated issuers and a smaller concentration of the riskiest bonds. Vanguard’s active management team seeks to mitigate this risk by identifying issuers facing serious risk compared to those navigating temporary challenges.

They’re less sensitive to interest rate changes due to their shorter durations. They tend to perform well in rising-rate environments if accompanied by strong economic growth and may struggle if rates rise due to inflation or recession concerns. 

High-yield bonds serve as a yield enhancer and diversifier, providing a different risk-return profile than core bonds. When combined thoughtfully, they can improve the income efficiency of a fixed income portfolio. 

Yes. Because these credit issuers often have less financial flexibility, their ability to service debt is more closely tied to economic performance and earnings stability. 

The market is less liquid than investment-grade markets. With experienced fund managers and strong trading desks, you have support in navigating periods of stress that can cause widening spreads and declining trading volumes.  

Individual bonds offer specific maturity and coupon control but require significant research and diversification to manage risk. High-yield bond funds provide diversification, professional management, and liquidity.

Have questions? Contact us.

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Disclosures and footnotes

1 Investment-grade bonds are those whose credit ratings are among the highest by independent bond-rating agencies.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Diversification does not ensure a profit or protect against a loss.
High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

All investing is subject to risk, including possible loss of principal.
Diversification does not ensure a profit or protect against a loss.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.