Quora Answer: Are Junk Bond ETFs Riskier Than Regular Stock Index ETFs?

The following is my answer to a Quora question: “Are junk bond ETFs more or less riskier than regular stock index ETFs?”

Junk bond ETF are known in the market as high yield ETF, because that sounds more marketable.  They are “junk” because they have a lower investment rating, meaning they are more volatile, and have to compensate by offering a higher yield to attract investors.

On paper, high yield ETFs are definitely riskier than regular ETFs.  It is a general maxim of investing that the higher the risk of the asset class, the greater the potential gain.  Conversely, it also means the greater the potential loss.  This does not mean that high yield ETF are to be avoided.  Rather, they are for more sophisticated investors.  High yield ETF and bond funds are doing very well, at the moment, because investors need a place to diversify their debt instrument portfolio in a time when yields of investment grade debt instruments, particularly sovereign bonds, are at historic lows.