NEW YORK (TheStreet) -- High-yield bond ETFs have enjoyed surging popularity. During the past year, investors poured $5.6 billion into the two biggest high-yield ETFs, iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK), according to IndexUniverse.com. Rich yields and strong returns have attracted the crowds. The two ETFs yield around 6.6%, and both returned more than 12% in the past year, according to Morningstar.Can high-yield funds continue rolling? Maybe. But the risks are growing as the share prices rise. High-yield bonds are rated below-investment grade, so they pose default risks. A crisis in Washington could send the low-quality bonds into a tailspin. To limit risk, consider a broadly diversified income ETF. Besides owning high-yield bonds, the diversified choices also hold high-quality assets. If junk bonds sink, the high-quality issues should help to stabilize the portfolios. An intriguing choice is PowerShares CEF Income Composite ( PCEF), which yields 7.4% and returned 15.9% in the past year. A new diversified ETF is iShares Morningstar Multi-Asset Income Index ( IYLD), which yields 7.0%.
Closed-end funds can also boost yields by using leverage. In a typical arrangement, a fund might raise $100 million from investors and use the cash to buy bonds. Then the portfolio manager borrows another $30 million against the assets. The manager takes the proceeds of the loans and buys more bonds. PowerShares compensates for the risks of leverage by investing in a wide collection of 126 closed-end funds. The list of holdings includes high-quality foreign bonds, taxable municipals, and mortgage-backed securities. Top holdings include AllianceBernstein Income ( ACG), Aberdeen Asia-Pacific Income ( FAX) and BlackRock Build America Bond ( TLT). The iShares Multi-Asset ETF also holds an unusually wide portfolio. The fund invests in a collection of other income ETFs. About 30% of assets are in equities, while the rest is invested in fixed income. The iShares fund owns Treasuries, mortgage securities, and foreign bonds. Holdings include iShares JP Morgan Emerging Market Bond, iShares FTSE NAREIT Mortgage ETF, and iShares Barclays 20-Year Treasury. Tracking a Morningstar index, the multi-asset ETF adjusts holdings as market conditions change. According to a set of rules, the allocation to an asset could be reduced as the yield becomes less appealing in relation to the risk. About 20% of assets are in iShares iBoxx High Yield Corporate Bond. In the current environment, the multi-asset ETF will continue to have a big allocation to high-yield bonds, says Morningstar portfolio manager Brian Huckstep. "High-yield bonds have good yields now and good risk-return tradeoffs," he says. Follow @StanLuxenberg This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.