After Comparing Every Bond ETF Paying Over 6 Percent, These 3 Win as the Fed Cuts Rates

Three bond ETFs have emerged as top performers in the post-Fed rate cut landscape, each delivering over 6% yields through distinct mechanisms. USHY, with its 6.9% yield, relies on high-yield corporate bonds, while CLOZ targets mezzanine tranches of collateralized loan obligations and TLTW manufactures income by selling calls against long-duration Treasuries.

The Federal Reserve has reduced its target rate from 4.5% to 3.75%, leading to reinvestment risk in money market funds. The 10-year Treasury is near 4.7%, and the 10-year minus 2-year spread has widened, indicating increased market risk. Doomberg, a non-bank finance publication, identified these ETFs, noting that each fund compensates investors for distinct risks: credit, structural, or duration risk.

USHY, with its low expense ratio of 0.08%, offers exposure to a diversified portfolio of over 500 high-yield corporate bonds. CLOZ, with a 0.50% expense ratio, invests in BBB- and B-rated tranches of collateralized loan obligations, which are less duration-sensitive than comparable fixed-rate bonds. TLTW, with a 0.35% expense ratio, generates income by selling call options on long-duration Treasuries, with a distribution yield of 11%.

While these ETFs offer attractive yields, each carries unique risks: credit risk for USHY, structural risk for CLOZ, and duration risk for TLTW. Doomberg's analysis suggests that investors should carefully consider these risks when allocating to these ETFs.