Improving Junk Bond Quality Could Boost This ETF

High yield debt, also known as junk bonds, isn’t always synonymous with quality, but that’s why there are credit ratings. Those grades give investors indications as to which bonds have some semblance of quality traits and upgrade potential while also providing clues about default risk and low quality.

For advisors and investors considering ETFs such as the Neuberger Berman Flexible Credit Income ETF (NBFC), the good news heading into 2026 is increasingly positive sentiment pertaining to the quality of junk bonds. Yes, that’s painting in broad strokes, but the economic climate could prove hospitable for junk bonds and NBFC in 2026.

“We’re expecting slower growth in the next couple of years than we’ve seen in previous years. We’re coming from a strong base of 2.9% GDP growth in 2023 and 2.8% in 2024. It’s only natural that we see cyclical normalisation. We believe that GDP growth is going to be in this 1-1/2 to 2% range, which is supportive for high-yield,” noted BNP Paribas.

NBFC Has Advantages

Regarding junk bonds’ intersection with NBFC, note that this actively managed ETF is not a dedicated high yield fund. However, it had a 39.6% allocation — its largest — to non-investment grade bonds at the end of the third quarter.

The ETF splits the difference between dedicated junk bond exposure and a more diverse approach to credit. However, as an actively managed fund, it can increase or decrease non-investment grade allocations as the managers see fit. It can also more rapidly adjust credit quality if higher-rated junk bonds are offering value.

Adding to the case for NBFC in 2026: While high-yield corporate often correlates to stocks, the former doesn’t need the latter to deliver whopping performances. A year of modest upside for stocks could be just what the doctor ordered for ETFs like NBFC.

“Well, because high-yield doesn’t necessarily need the superstrong growth that equities tends to enjoy. That tends to lead to excesses, whether it’s too much leverage or share buybacks, none of which is particularly good for bond holders. Having this kind of controlled slowdown, which we believe we’re going to be in for the next couple of years, is really the sweet spot for high-yield,” added BNP Paribas.

The bank also noted that demand for higher quality junk bonds, including those with rising star potential, is increasing. That could be relevant to investors considering NBFC. The ETF devotes more than 30% of its weight to bonds with the highest non-investment ratings.

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