3 High-Yield Funds for Spectacular Returns in 2021 – January 13, 2021

The coronavirus pandemic injected sudden volatility into global financial markets and rattled asset prices last year. In fact, asset prices went for the most jarring rollercoaster ride since the great financial crisis in 2008. In an attempt to save the economy, the government took several actions that included providing fiscal stimulus and interest rate cut by the Federal Reserve to near zero to reduce the cost of credit and improve liquidity for borrowers.

While the Fed intends to keep interest rate at near zero through 2023, high-yield bonds can be a good bet for income seeking investors in 2021. Higher-yielding funds help investors reach their fixed income goals, which is a prime concern during this volatility. These bonds, unlike investment-grade bonds, respond well during periods of strong economic growth. With vaccines rolling out and the Biden administration promising further fiscal stimulus to boost the economy, markets are poised to grow.

High-yielding bonds behave more like stocks than investment-grade bonds. These bonds have significant holdings in smaller companies, which are considered to have weaker financial condition but benefits as the economy moves north. Though high-yield bonds are more exposed to credit risk, these have less exposure to interest rate risk, making them a differentiated source of return. Despite headwinds faced in the early months of the pandemic, demand for high yield has recovered since the Fed’s rate cut and reopening of the economy. The improving economic activity renewed search for yield, and given the current scenario these bonds are poised to grow.

3 Funds to Buy

We have shortlisted three high-yield mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to grow. Moreover, these funds have encouraging three-year returns. Additionally, the minimum initial investment is within $5000. We expect these funds to outperform their peers in the future.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

PGIM Floating Rate Income Fund- Class Z (FRFZX Free Report) aims to maximize current income, while capital appreciation is a secondary consideration. The fund invests majority of its investible assets in floating rate loans and other floating rate debt securities and the rest in senior loans that are not secured by any specific collateral.

This Zacks sector – High Yield-Bonds product – has a history of positive total returns for more than 10 years. Specifically, FRFZX has returned 3.5% and 4.4% over the past three and five years, respectively.  To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FRFZX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.72%, which is below the category average of 1.06%.

John Hancock Funds II High Yield Fund Class 1 (JIHDX Free Report) aims to realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk. The fund invests majority of its net assets in high yield securities that include foreign bonds and other fixed-income securities denominated in foreign currencies.

This Zacks sector – High Yield-Bonds product – has a history of positive total returns for more than 10 years. Specifically, JIHDX has returned 5.7% and 8.2% over the past three and five years, respectively.  To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

JIHDX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.81%, which is below the category average of 1.0%.

Fidelity High Income Fund (SPHIX Free Report) aims fora high level of current income, while growth of capital may also be considered. The fund invests in income producing debt securities, preferred stocks and convertible securities, with emphasis on lower-quality debt securities. Both domestic and foreign issuers are considered.

This Zacks sector – High Yield-Bonds product – has a history of positive total returns for more than 10 years. Specifically, SPHIX has returned 4.5% and 6.8% over the past three and five years, respectively.  To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

SPHIX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.69%, which is below the category average of 1.00%.

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