High-yield bonds behave more like stocks than investment-grade bonds. These bonds have significant holdings in smaller companies, which are considered to have a weaker financial condition but benefit as the economy moves north.

Although 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 the headwinds faced during the Fed’s tightening of monetary policy, with indications coming in from the Fed that it might slow down its steep rate of hikes, these bonds are poised to grow.

Below, we share with you three top-ranked high-yield bond mutual funds, namely Fidelity Advisor Floating Rate High Income FFRAX, Payden High Income PYHRX and American Funds American High-Income AHITX. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of funds.

Fidelity Advisor Floating Rate High Income fund invests most of its net assets in issues of domestic and foreign lower-quality debt securities, floating-rate securities, money-market instruments, investment-grade debt securities and repurchase agreements. FFRAX advisors use fundamental analysis factors such as the issuer's financial condition, industry position, market and economic conditions for investment decisions.

Fidelity Advisor Floating Rate High Income fund has three-year annualized returns of 5.3%. As of the end of October 2023, FFRAX held 62.1% of its net assets in miscellaneous bonds.

Payden High Income fund invests most of its net assets in a variety of debt instruments and income-producing securities like corporate debts, which are marked below investment grade by at least one of the recognized rating agencies. PYHRX advisor “Payden & Rygel” also chooses to invest based on comparable quality.

Payden High Income fund has three-year annualized returns of 3.3%. PYHRX has an expense ratio of 0.59% compared with the category average of 0.95%.

American Funds American High-Income fund invests most of its assets in high-yielding and low-quality debt securities of domestic and foreign issuers, which are rated Ba1/BB+ or below by nationally recognized rating organizations or other issues of equivalent quality based on the fund manager’s judgment. AHITX advisors also invest in corporate loan obligations.

American Funds American High-Income fund has three-year annualized returns of 2.9%. Tara L. Torrens has been one of the fund managers of AHITX since May 2015.

To view the Zacks Rank and the past performance of all high-yield bond funds, investors can click here to see the complete list of high-yield bond funds.

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