How diversifying with purpose can help elevate your plan’s lineup

These funds can and generally will invest in high-yield and emerging markets bonds, which can enhance portfolio returns but also introduce additional risks, making it important for investors to understand their characteristics and role in multiasset portfolios.

High-yield bonds are issued by corporations considered riskier and offer higher returns than investment-grade bonds, often delivering equity-like performance with lower volatility. Over the past two decades, the U.S. high-yield market has grown to $1.4 trillion,¹ with improved credit quality and historically strong risk-adjusted returns.

Emerging markets bonds are issued by governments and corporations in developing nations, typically carrying lower credit ratings due to greater economic and political risks. However, the market has grown in size and quality over recent decades, offering investors a more diverse and attractive opportunity set driven by reforms and economic progress.

High-yield and emerging markets bonds provide diversification and potential for enhanced returns, supported by historical risk premia and improving issuer quality. Investing in these sectors can boost total portfolio performance and Sharpe ratios, especially in portfolios with larger bond allocations.

With more than $2.5 trillion in fixed income assets, including more than $1 trillion in active fixed income, Vanguard employs a global team of 200-plus experts covering various fixed income sectors to ensure a diversified and scalable approach. With our decades of experience and economies of scale, we strive to deliver consistent results with competitive fees, making our active fixed income products a valuable option for DC plans.

In this paper, we share insights into the evolution of the high-yield and emerging markets bond markets and how these sectors fit into a multiasset portfolio. Read the full commentary to learn more about the benefits of and considerations for these product categories.