Table Of Content
Ways to Invest in Junk Bonds
How you invest in junk bonds depends on your risk tolerance and how hands-on you want to be. Here are the main ways people typically invest:
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Buy Individual Junk Bonds Through a Brokerage
If you're comfortable with higher risk and want more control, you can buy junk bonds directly through a brokerage like Fidelity, Charles Schwab, or E*TRADE.
For example, you might purchase a 3-year bond issued by a smaller energy company with a BB rating and a higher-than-average yield.
This approach gives you direct exposure to specific companies—ideal for active investors who want to handpick their opportunities and are comfortable evaluating credit risk.
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Invest Through High-Yield Bond Funds or ETFs
If you'd rather not spend hours researching individual bonds, junk bond mutual funds or ETFs are a great way to get diversified exposure.
A fund like the SPDR Bloomberg High Yield Bond ETF (JNK) or iShares iBoxx $ High Yield Corporate Bond ETF (HYG) spreads your investment across hundreds of lower-rated issuers.
This is perfect for passive investors who still want to tap into the higher income potential of junk bonds—but with built-in diversification to help manage default risk.
Feature | Individual Junk Bonds | Junk Bond ETFs |
|---|---|---|
Diversification | Limited to chosen issuer(s) | Broad exposure to many issuers |
Yield Potential | Potentially higher with hand-picked bonds | Averaged out across holdings |
Risk | Higher (concentration risk) | Lower (diversified holdings) |
Research Required | High – must analyze each issuer | Low – managed by fund professionals |
Liquidity | May be less liquid, especially for thinly traded bonds | High – ETFs trade like stocks |
Fees | No fund fees, but may have trade markups | Low expense ratios, but fund fees still apply |
Ideal For | Active, hands-on investors | Passive, income-seeking investors |
How to Buy Junk Bonds Through a Brokerage
Buying junk bonds through a brokerage account is one of the most direct (and potentially rewarding) ways to invest in high-yield fixed income—but it comes with extra steps to manage risk.
Here’s a step-by-step breakdown:
Step 1: Choose a Brokerage That Supports High-Yield Bonds
Not all brokerages offer the same access to junk bonds, so choose one with a large bond inventory and solid research tools.
Fidelity, Schwab, and E*TRADE all provide access to high-yield bonds along with bond screeners and credit ratings.
For instance, if you’re targeting a 5-year BB-rated bond from a mid-sized healthcare firm offering a 7% yield, you'll want a platform that lets you find and purchase it without extra friction.
Broker | Annual Fees | Best For |
|---|---|---|
E-Trade | 0% – 0.35%
0% on stocks and ETFs in self directed brokrage, 0.35% for Core Portfolio Robo Advisor
| Options & Futures Trading |
Interactive Brokers | 0% – 0.75%
$0 online commission on U.S. listed stocks and ETFs, Options: $0.15 – $0.65 per-contract, Futures: $0.25 – $0.85 per-contract. For Interactive Advisors: asset-based management fees of 0.10% to 0.75% | Professional Trading Tools |
Fidelity | 0% – 1.04%
Fidelity Go® Robo advisor: $0: under $25,000, 0.35%/yr: $25,000 and above
Fidelity® Wealth Management dedicated advisor: 0.50%–1.50%
Fidelity Private Wealth Management® advisor-led team: 0.20%–1.04%
| Retirement Account Investing |
Vanguard | Up to 0.30%
$0 online commission on U.S. listed stocks, mutual funds and ETFs, options: $0.65 per-contract, Vanguard Digital Advisor – 0.015%, Vanguard Personal Advisor: 0.03%, Vanguard Personal Advisor Select: up to 0.03%, Vanguard Wealth Management: up to 0.03% | Low-Cost ETF Investors |
J.P. Morgan Self Investing | $0
$0 online commission on U.S. listed stocks and ETFs and $0.65 per-contract | Chase Bank Customers |
Charles Schwab | Up to 0.80%
$0 online commission on U.S. listed stocks, mutual funds and ETFs, options: $0.65 per-contract, Schwab Intelligent Portfolio – 0%, Schwab Intelligent Portfolios Premium – One-time planning fee: $300 + Monthly advisory fee: $30, Schwab Wealth Advisory: up to 0.80% | Advanced Trading Tools |
Merrill Edge | 0.45% – 0.85%
0.45% for Merrill Robo Advisor (Guided Investing), 0.85% for Investing With An Advisor | Bank of America Clients |
Step 2: Use a Bond Screener to Filter High-Yield Options
Once your account is ready, head to the bond screener tool. You can filter by credit rating (typically BB+ or below for junk bonds), maturity date, coupon rate, industry sector, and more.
For junk bond investors, this tool is essential. Maybe you want shorter-term bonds with a yield over 8% from the energy sector—you can plug those parameters in and see what's available.
It’s like shopping online—but for higher-risk, higher-reward income opportunities.
Step 3: Understand What You’re Buying
Before you buy, take time to read the bond listing details:
Issuer (e.g., a speculative-grade telecom company)
Coupon rate (the interest you’ll earn annually)
Maturity date
Current market price (bonds often trade above or below face value)
Credit rating from Moody’s, S&P, or Fitch
Because junk bonds carry a higher risk of default, always look at the issuer’s financial health, debt levels, and industry outlook. For example, a 10% yield might sound tempting—but not if the company is on the brink of bankruptcy.
Step 4: Place Your Order
Once you’ve found a bond you’re confident in, place your order. Most junk bonds are sold in $1,000 increments. So, if you want to invest $10,000, you’d enter a quantity of “10.”
You can buy on the secondary market (from another investor) or participate in a new bond issue if available. New issues can sometimes offer slightly better pricing.
Your brokerage will show you an estimated total cost, including markups or commissions. Be sure to review that carefully before hitting “submit.”
With junk bonds, every fraction of yield matters—especially if you’re building a laddered or diversified portfolio.
Things to Consider When Buying Junk Bonds
Before diving into junk bonds, it’s important to fully understand the risks, rewards, and how they fit your overall investment strategy. These aren’t your typical investment-grade products—they require a bit more due diligence.
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Know What Type of Junk Bond You’re Buying
Not all junk bonds are created equal. Some are callable (the issuer can pay them off early), others may be secured (backed by specific assets), while many are subordinated (lower priority if the company defaults).
High-yield bonds can offer strong returns, but make sure you understand the structure—especially if the bond has features like deferred interest payments or early redemption clauses.
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Always Check the Credit Rating
Junk bonds are typically rated BB+ or lower by agencies like Moody’s, S&P, or Fitch. These ratings signal a higher risk of default. Still, there’s a big difference between a BB-rated company and one rated CCC or below.
You’ll want to compare ratings across agencies and consider whether the yield you're getting is appropriate for the risk.
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Research the Issuer’s Financials
Don’t just stop at the credit rating. Dig into the company’s:
Debt load and coverage ratios
Cash flow and earnings trends
Sector risk and economic sensitivity
Many junk bond issuers operate in cyclical or distressed industries. Understanding their business model and recent performance can help you avoid potential defaults.
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Use Trusted Sources to Verify Data
Websites like FINRA’s Bond Center, Morningstar, and even your brokerage platform can help you dig deeper into pricing history, ratings, and issuer background.
Don’t rely on just the yield—look at spreads, trading volume, and any recent news about the issuer.
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Align the Bond With Your Risk Tolerance and Goals
Junk bonds can be part of an income strategy—but they’re not a safe haven. Think about:
Time horizon (shorter maturities may reduce risk)
Diversification (don’t load up on one issuer)
Income needs vs. capital preservation
If you’re approaching retirement, a small allocation might make sense for income—but younger investors might afford more exposure, provided they diversify.
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Be Aware of Tax Implications
Interest income from junk bonds is taxed as ordinary income, which can be steep if you're in a high tax bracket.
Consider holding them in tax-advantaged accounts like IRAs or 401(k)s if you're trying to reduce tax drag on high yields.
Best Brokers to Buy Junk Bonds
Not all brokerages are equal when it comes to junk bond access and tools. Here are top platforms that cater well to high-yield bond investors:
- Fidelity: Known for its extensive bond inventory (including high-yield options), real-time pricing, and bond screener that lets you filter by rating, yield, sector, and more. No commission on new issues.
- Charles Schwab: Strong research tools and easy access to speculative-grade bonds. Schwab’s screener lets you search by yield-to-maturity, credit rating, and sector—all critical when shopping for junk bonds.
- E*TRADE: Great for active traders and those looking for deep customization. Offers real-time quotes and a variety of junk bond offerings, plus tools to filter by issuer risk and yield potential.
- Interactive Brokers: Ideal for investors looking for global exposure to high-yield bonds, including international issuers. Known for low fees and robust analytics.
FAQ
A junk bond is a corporate bond with a lower credit rating, meaning it's riskier but offers higher potential returns to attract investors.
Companies issue junk bonds because they may not qualify for traditional loans or investment-grade bonds and need to offer higher yields to attract capital.
Junk bonds can be complex due to the credit risks involved. Beginners should consider starting with high-yield bond funds to gain diversified exposure.
Yes, junk bonds have a higher risk of default compared to investment-grade bonds, especially during economic downturns or if the issuer faces financial stress.
Yes, like all bonds, junk bonds are sensitive to interest rate changes, though they are often more influenced by credit risk than interest rate risk.
Yes, they can be held in IRAs and other retirement accounts, which can help shelter the interest income from taxes.
Liquidity varies by issuer and market conditions. Some junk bonds trade actively, while others may have limited buyers and sellers.
