The lure of junk bonds

High-yield issues offer potential rewards but at high risk

It hasn’t been a great year for bonds to this point. After cutting rates last winter, the Bank of Canada and the U.S. Federal Reserve Board have until very recently been sitting on their hands, waiting for a clearer picture of where the economy is heading.

As of Sept. 30, the iShares Core Canadian Universe Bond Index ETF (TSX: XBB) was showing a year-to-date gain of 2.69%. Its U.S. equivalent, the iShares US Aggregate Bond Index ETF (TSX: XAGG), was up 2.58% in Canadian dollar terms.

But there is one type of fixed income fund that is doing well in the current environment: High-yield bonds or, as they are known colloquially, junk bonds.

The iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY) has been a recommendation of my Internet Wealth Builder newsletter since 2019. It has done very well this year, with a gain of 5.71% as of Sept. 30.

Emerging market opportunity

But another junk bond fund has done even better. Most bond funds are struggling to keep their heads above water these days. This is one of the few exceptions. The caveat is that investors will incur higher risk in return for superior cash flow. Here are the details.

J.P. Morgan USD Emerging Markets Bond Index ETF (CAD-Hedged) (TSX: XEB). This ETF trades on the Toronto Stock Exchange. It is denominated in Canadian dollars. The fund was launched in April 2011 and has about $25 million in assets under management. The MER is 0.54%. The fund is showing a total return of 8.87% year to date as of Sept. 30, but that doesn’t reflect long-term results Over the past five years, the average annual compound rate of return is 0.02%. Obviously, there is risk here.

Payouts are made monthly. The current rate is $0.064 per unit ($0.768 annually). Note this is not guaranteed and may vary from month to month.

There are, however, several risks. For starters, the bond market itself will be under pressure if U.S. inflation spikes as Trump’s tariffs work their way through the economy. Second, should a global recession develop, the risk of default will rise. Third, bonds issued by developing countries carry a higher credit risk than those of Canada, the U.S., and most European countries. Less than one quarter of the bonds in this portfolio are rated A or better.

To illustrate what can happen when this type of fund goes sour, this ETF lost almost 20% in 2022.

This fund is best suited for investors who are willing to accept a higher level of risk in return for superior fixed income returns. Based on the fund’s long-term history, I recommend monitoring it closely. Be prepared to exit quickly if the junk bond market goes into reverse.

As always consult with your financial advisor before investing to ensure the investment aligns with your risk tolerance level and your financial objective.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2025 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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