But a high-yield fund shouldn’t account for more than 10 percent of someone’s portfolio — even that percentage would be high for cautious folk, Mr. Moriarty said. And because they don’t provide the protection in a severe downturn that Treasuries do, it may make sense to consider them, for allocation purposes, as part of your stock, rather than bond, basket.
Bonds are classified according to the ratings they receive from credit-rating agencies like Standard & Poor’s and Moody’s Investors Service. Better-rated, less-risky ones are termed investment grade, while lower-rated, riskier ones are high yield. The latter often have paid interest rates ranging from 6 percent to 10 percent, though in the current low interest-rate world, yields are generally lower: The Vanguard High-Yield Corporate fund’s yield is less than 5 percent.
High-yield bonds’ total return — their yield plus increases in their price — has made them a better performer than stocks over the last 20 years. From 2000 through the end of April, they provided a 6.5 percent annualized total return, compared with 5.4 percent for the S&P 500.
Over other periods, stocks have usually done better, though their returns have also zigzagged more. Andrew R. Jessop, manager of the PIMCO High-Yield Fund, said high-yield bonds typically deliver “half the return of equities with half the volatility.”
This year, high-yield bonds, like so many other assets, were shaken by the coronavirus. The iShares iBoxx High-Yield Corporate Bond E.T.F., a passively managed E.T.F. tracking a board-market index, sank in mid-March, only to rebound later that month and in April. The fund lost 5.36 percent year to date through the end of June. But for the 10 years that ended in June, it returned an annualized average of 5.6 percent. Its yield is a little over 5 percent.
The Federal Reserve’s announcement of programs to shore up corporate borrowing accounted for much of the rebound in corporate bonds of all sorts. “The Fed has been loud and clear in saying, ‘We are going to support the corporate credit markets,” said Elaine M. Stokes, one of the managers of the Loomis Sayles Bond Fund. The central bank even said it would buy shares of E.T.F.s that include some junk bonds.
The current recession is likely to drag some corporate borrowers’ credit ratings from investment grade to high yield. With the very low interest rates of the last several years, many companies doubled down on debt, said David Delbos, a co-manager of the BlackRock High-Yield Bond Fund.