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ETFs vs. Mutual Funds: High-Yield Debt

NEW YORK ( TheStreet) -- Exchange-traded funds are grabbing increasing attention from investors due to their low cost, transparency and unique offerings, but that doesn't mean mutual funds are out of the game.

On the contrary, when it comes to high-yield bonds, mutual funds are besting their ETF competitors in total return.

More than $1 billion combined flowed into the two largest high-yield ETFs in March: the iShares iBoxx High Yield Corporate Bond (HYG) and the SPDR Barclays High Yield Bond (JNK). This impressive inflow indicates that investors are not only seeking out high yields, but also that retail investors are becoming more confident about the U.S. and global economic recovery.

HYG, the older of the two ETF instruments, has been able to accumulate more than $5 billion in assets since launching in the first quarter of 2007. The fund has a 0.50% expense ratio, an 8.1% yield and an index consisting of 300 individual constituents.

HYG's top holdings include the debt of Texas Competitive Electric, NRG (NRG) and Sprint Nextel (S). Due to the depth of the fund's underlying index, no single holding steers its performance, and HYG's top 10 holdings account for only 10% of its portfolio.

JNK, which hit the ETF scene at the close of 2007, has attempted to steal some market share with its lower 0.40% expense ratio and an 8.3% yield. Although JNK is in second place, it has still been able to amass a respectable $4.5 billion of its own.

Compared with HYG, JNK's index is more concentrated, with the top 10 holdings accounting for nearly one-fifth of the fund's total index. Top holdings include debt securities issued from AIG (AIG), GMAC (GJM), and Citigroup (C).

HYG and JNK, however, are not the only tools that allow investors access to high-yield debt. The Federated High-Income Bond Fund (FHIIX) and Fidelity High Income Fund (SPHIX) are two options worth considering.

FHIIX and SPHIX, like their ETF cousins, track a select basket of low-grade corporate debt. However, while HYG and JNK are designed as passive products, the mutual fund offerings take an active approach to the industry, relying on the investing savvy of their respective managers. This strategy allows FHIIX and SPHIX to alter holdings to better track the market. Unfortunately for investors, it also leads to higher expense ratios. SPHIX and FHIIX charge investors 0.77% and 1.23%, respectively, in addition to short-term fees of 1% and 2%, respectively, for any shares held less than 90 days. FHIIX also has a 4.5% front end load.
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