Income Investors: These Two High-Risk Bond ETFs Pay 8%+ Yields Monthly

The big story this week is Moody’s downgrading U.S. government debt from Aaa to Aa1, the same move Fitch made back in 2023. While Treasurys are still considered low risk, the downgrade sends a signal about the rising concerns over fiscal stability and has introduced fresh volatility into the bond market. For once, the usual "flight to safety" narrative is being challenged.

But maybe safety isn’t what you’re after. Bonds aren’t just for capital preservation. Some corners of the market aim to deliver high income and take on considerably more risk. In fact, a few bond ETFs offer yields that rival (or even exceed) what you’d find in master limited partnerships (MLPs), business development companies (BDCs), or covered call ETFs.

Fair warning, though: this isn’t a free lunch. These ETFs venture into subprime credit, structured finance, and other corners of the market where downside risk can be substantial, especially during selloffs when liquidity dries up just as you may need it most. As with anything offering an 8%+ yield, caveat emptor.

BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC)

Once you drop below a BBB credit rating, you leave the world of investment-grade bonds and enter what's known as high yield or, more bluntly, junk bonds. I prefer the latter term, because let’s be honest: a lot of what ends up here is barely hanging on.

But even among junk, there's a spectrum of risk, and CCC-rated bonds sit at the very bottom of what’s allowed in most ETF wrappers. A CCC rating implies that the issuer is highly vulnerable to default, particularly if business conditions worsen or access to credit tightens.

These are companies already on shaky ground, and it doesn’t take much for things to fall apart. Ratings agencies assign this level when there’s a real risk the firm might not be able to meet its debt obligations without favorable external conditions.

That’s where an ETF like XCCC comes in. It tracks the ICE BofA US Cash Pay High Yield CCC & Lower Index, which includes U.S. dollar-denominated corporate bonds rated CCC1 through CCC3. Ratings are based on an average from Moody’s, S&P, and Fitch, meaning these aren’t borderline downgrades; they’re collectively flagged as near default.

To keep the portfolio from completely imploding, XCCC has some built-in constraints. While it doesn’t use hedging strategies, it caps issuer exposure at 2%, ensuring no single failing company can sink the whole ETF. This helps diversify credit risk across the riskiest corner of the market.

Liquidity is decent for the ETF itself, with a 0.10% 30-day median bid-ask spread, but don’t expect miracles. CCC-rated bonds are notoriously illiquid, even in good times. Most institutional players aren’t eager to hold this paper unless they're chasing yield or have a high-risk tolerance, and in periods of stress, liquidity can vanish entirely.

What’s the tradeoff? A 12.5% 30-day SEC yield, one of the highest you'll find in a bond ETF. And at 0.40%, the expense ratio is surprisingly reasonable for something this niche and volatile.

But be warned: that yield can drop quickly if interest rates fall and refinancing becomes impossible, or if a wave of defaults and downgrades hits the portfolio. And during a market downturn, don’t be shocked if the share price plummets; because when these issuers fail, there’s often little left for bondholders to recover.

Eldridge BBB-B CLO ETF (CLOZ)

To understand what CLOZ holds, you first need to understand how a collateralized loan obligation (CLO) is created. It all starts with a portfolio of senior secured loans, typically issued by below-investment-grade companies. These loans are pooled together by a manager, who actively buys and sells them based on credit quality and risk.

Once enough loans are gathered, they’re bundled and securitized sliced into tranches, or layers, each with different risk and return profiles. The top tranches (like AAA) get first priority on cash flows and are the safest. As you go lower—AA, A, BBB, BB, B—the credit risk increases, but so do the yields. The bottom layer is the equity tranche, which absorbs losses first and gets paid last.

CLOs are generally floating rate instruments, meaning they pay interest based on a reference rate like SOFR plus a spread. This makes them attractive in rising rate environments. Structurally, CLOs are more resilient than you might think—each deal is backed by loans to dozens, sometimes hundreds, of borrowers, reducing idiosyncratic risk.

They’re also managed by professionals who can actively trade the underlying loans. And importantly, they're built to withstand defaults, with protections like overcollateralization and interest coverage tests baked in.

If you're targeting non-investment-grade CLO tranches, your best ETF option is CLOZ. It’s benchmarked to the JP Morgan CLO High Quality Mezzanine Index, which focuses on the mezzanine layer—generally the BBB and BB-rated slices. In structured finance, “mezzanine” means you’re in the middle of the capital stack: not the riskiest, but not the safest either.

CLOZ holds a mix of BBB-rated (just above junk) and BB-rated (definitely junk) tranches. That’s where the yield pickup comes from. The current 30-day SEC yield is 8.16%, which is appealing, but not without risk. What would it take for these tranches to default?

First, a wave of corporate loan defaults in the underlying pool. Then, the equity tranche would absorb losses, followed by the riskiest debt tranches. For CLOZ to start losing principal, you’d need very high, sustained default rates in the leveraged loan market.

But this isn’t 2008. CLOs today are not the same as CDOs of the financial crisis. The underlying assets are senior secured loans, not subprime mortgages and CLO managers are subject to tighter regulation and risk retention rules. CLOs also benefit from diversification, active management, and structural safeguards that didn’t exist in the CDO market.