HYG tracks the Markit iBoxx USD Liquid High Yield Index, which holds US dollar corporate bonds rated below investment grade. These issuers pay higher interest rates to compensate investors for greater default risk. High yield bonds tend to behave more like stocks than investment-grade bonds: they often fall in periods of economic stress when default expectations rise and do better when the economy is expanding. Returns depend more on changes in credit spreads, the extra yield over Treasuries, than on interest rate duration. Correlation with equities has been high in risk-off periods, so HYG does not provide the same diversification as Treasury funds. In a recession, spreads can widen sharply and cause losses that outweigh several years of extra income.
