Best UK Corporate Bonds 2024
Updated December 13, 2023
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Top 5 UK Bond Funds to Invest In:
- iShares USD Treasury Bond 20+yr ETF
- Janus Henderson Strategic Bond Fund
- Lyxor Core UK Government Inflation-Linked Bond ETF
- SPDR Bloomberg High Yield Bond ETF (JNK)
- Vanguard Total Bond Market ETF
Bonds are a type of debt security and a practical, low-cost investment opportunity if you are keen to diversify your portfolio without high levels of risk.
Bond funds are a form of pooled investment comprising corporate and government bonds.
Top 5 UK Corporate Bonds – Best UK Corporate Bonds
Choosing which corporate bonds to invest in will depend on your tolerance for risk and overall reasons for investing.
For example, suppose your tolerance for risk is low, and you are okay with holding onto your stakes in the funds for a significant period before seeing a return. In that case, you might invest in long-term bond funds, such as the Lyxor Core UK Government Inflation-Linked Bond ETF.
If you are looking to target higher potential returns over a shorter time frame, consider investing in a fund that offers exposure to short term UK corporate bonds, such as the SPDR Bloomberg High Yield Bond ETF (JNK).
The best UK corporate bond funds will depend on a few different factors.
Read on to learn about some of the top five corporate bonds available to UK investors, including short term UK corporate bonds.
1. iShares USD Treasury Bond 20+yr ETF
The iShares USD Treasury Bond 20+yr EFT exposes investors to US treasury bonds. There are numerous US government bonds, and the fund's total size is approximately $3.6 billion.
According to Google Finance, this fund opened at £3.56 on the morning of 19 May 2023. This represents a decline in value over the past six months.
Visit iShares USD Treasury Bond 20+yr ETF
2. Janus Henderson Strategic Bond Fund
This fund aims to invest in high-yield bonds across numerous markets. These include high yield UK corporate bonds, investment-grade bonds, corporate bonds and government bonds.
This is a comparatively large fund, with Financial Times records showing a total fund of £2.96 billion at the end of January 2023.
As of 30 April 2023, its top holdings include United Kingdom Gilt 4.25% (7.13%), United Kingdom Gilt 1.25% (3.17%), United States Treasury Note 2.875% 2032 (2.43%) and Australian Government Bond 1.25% 2032 (2.16%).
The Janus Henderson Strategic Bond Fund hedges its assets by acquiring them in currencies other than GBP. The fund typically seeks to hedge against the base currency, removing the risk of currency exchange changes. Since the pound is weak compared to other worldwide currencies, the Janus Henderson Strategic Bond is a solid addition to any investment portfolio.
Visit Janus Henderson Strategic Bond Fund
3. Lyxor Core UK Government Inflation-Linked Bond ETF
This UK corporate bond ETF invests in UK government securities. This bond fund offers exposure to sterling-denominated bonds that the UK government issues, so it is considered a relatively safe investment option.
It is also inflation-linked and offers twice-yearly dividends with an average monthly yield of 0.45%.
Visit Lyxor Core UK Government Inflation-Linked Bond ETF
4. SPDR Bloomberg High Yield Bond ETF (JNK)
This fund comprises ‘junk’ bonds, which the associated rating agencies have given low credit ratings. This means that the bonds are considered to be below investment grade.
As a result, this bond fund carries a greater level of risk; however, it offers the potential for higher capital growth than other options.
Visit SPDR Bloomberg High Yield Bond ETF (JNK)
5. Vanguard Total Bond Market ETF
This fund invests predominantly in investment-grade government bonds. Since US-backed government bonds have a high credit rating, this fund is relatively low-risk.
It includes more than 17,000 different bonds. The total assets have a combined worth of around $86.5 billion. Although it offers a lower risk level, this fund's potential returns are better than other options
Visit Vanguard Total Bond Market ETF
What Are Corporate Bonds?
Corporate bonds are debt instruments issued by corporations to raise capital.
They are considered fixed income securities as they represent a loan made by investors to the issuing company.
When investors purchase corporate bonds, they essentially lend money to the company in return for periodic interest payments and the repayment of the principal amount at maturity.
Corporate bonds are available in two categories:
- High-yield
- Investment-grade
High-yield bonds tend to be riskier, whereas investment-grade bonds are generally considered a higher-quality type of investment.
Corporate bonds are typically issued through an underwriting process, where investment banks or financial institutions help facilitate the sale of the bonds to investors.
The bonds have a face value, which represents the amount borrowed by the company, and a coupon rate, which determines the interest payments made to bondholders.
The maturity date indicates when the issuer will repay the full face value of the bond.
Example
An investor buys a treasury bond from the UK government. In this scenario, the investor is lending the government funds, which it will use to fund public works.
The investor will receive regular interest from the bond (referred to as the coupon) and will be given a fixed expiry date for the bond.
When the expiry date is reached, the investor receives back the initial money they invested. The investor earns a profit by accruing interest on top of their original investment.
Benefits and Risks Associated with Corporate Bonds
Benefits
- Stable Income – Corporate bonds provide regular interest payments, offering a predictable income stream to investors.
- Diversification – Including corporate bonds in an investment portfolio can help diversify risk by adding an asset class with different characteristics than stocks.
- Capital Preservation – Compared to stocks, corporate bonds generally carry lower risk of principal loss, providing a level of capital preservation.
- Higher Yields – Some corporate bonds offer higher yields compared to government bonds or savings accounts, potentially providing attractive income opportunities.
Risks
- Credit Risk – There is the risk that the issuing company may default on its obligations, resulting in potential loss of income or principal for bondholders.
- Interest Rate Risk – Changes in interest rates can affect bond prices. Rising interest rates typically lead to price declines, while falling rates can lead to price increases.
- Liquidity Risk – Some corporate bonds may have limited trading activity, which can impact the ease of buying or selling the bonds.
- Call Risk – Callable bonds may be subject to early redemption by the issuer, potentially impacting the expected returns for bondholders.
How to Select the Best UK Corporate Bonds
When evaluating the best UK corporate bonds, a comprehensive assessment should be conducted using a set of specific criteria.
The following are key criteria commonly used in the evaluation process:
Creditworthiness
The creditworthiness of the issuing company is a critical factor in evaluating corporate bonds.
Credit ratings assigned by reputable rating agencies, such as Moody's, Standard & Poor's and Fitch Ratings, are taken into consideration.
These ratings provide an indication of the issuer's ability to fulfill its debt obligations.
Bonds issued by companies with higher credit ratings generally have lower default risk, making them more desirable for investors.
Financial Health
The financial health of the issuing company is assessed to evaluate its ability to generate sufficient cash flow and meet its debt obligations.
Key financial indicators, including revenue growth, profitability, debt levels, liquidity and cash flow stability, are analyzed.
Companies with strong financials and a solid track record of performance are generally more attractive for investment.
Industry Trends
The evaluation also takes into account the trends and conditions within the industry to which the issuing company belongs.
Factors such as market demand, competitive landscape, regulatory environment and emerging trends are considered.
Companies operating in industries with favorable growth prospects and stable market conditions are often more appealing.
Yield
The yield offered by the bond is an important criterion for investors seeking income-generating investments.
The yield-to-maturity (YTM), which reflects the total return an investor can expect if holding the bond until maturity, is evaluated.
Bonds with competitive yields relative to their risk profile are considered more favorable.
Risk Assessment
Risk evaluation is crucial in bond selection. Factors such as credit risk, interest rate risk, liquidity risk and call risk are assessed.
Credit risk refers to the probability of default by the issuer, while interest rate risk considers the potential impact of changes in interest rates on bond prices.
Liquidity risk examines the ease of buying or selling the bonds, and call risk analyzes the possibility of early redemption by the issuer.
Potential Returns
The potential returns of the bond are estimated by considering the coupon payments, potential capital appreciation and market conditions affecting bond prices.
Evaluating the potential for both current income and capital gains helps determine the overall attractiveness of the bond.
How to Buy UK Corporate Bonds
Buying corporate bonds is a straightforward process. Read on to find out how you can get started.
Step 1. Open an Account with a Broker
The first step is to find a broker and open an account. You can find a choice of different brokers online, each of which offers its own advantages and disadvantages.
For example, some brokers provide low trading fees, making them a good option for investors wanting to trade high shares. Low trading fees mean they will not lose as much of their profits.
It is essential to do some research before making a decision. Consider how much you want to invest and what level of risk you can commit to. All this information will help you find the best broker for your investment needs.
As a novice investor, consider opening an account with a broker offering high-quality research and educational resources. You can use these to learn more about investing alongside actively trading from your account.
You should also look at the non-trading fees set out by each broker. These include things like minimum deposit requirements and inactivity charges.
Consider how much you want to invest and whether this aligns with the minimum deposit requirements, and think about how often you wish to make transactions. If you will use your account infrequently, choose a broker that offers low non-trading fees.
Before making your final decision, check if your preferred broker offers access to the type of bond funds you want to invest in.
Need help choosing an online broker? Here is an overview of some of the best online stock brokers and trading apps available in the UK.
Step 2. Decide on the Fund to Invest In
Once you have set up an account with your preferred broker, the next stage is finding a fund you want to invest in.
To decide, find one that offers the best returns at the level of risk you are comfortable with. Brokers sometimes support you, but carrying out your research is always the best option.
If your tolerance to risk is high and you want to expose the money in your investment portfolio to the better potential for high returns, choose a high-yield bond fund.
If you are looking for passive, long-term investment opportunities, consider bond funds with lower risk profiles and returns.
Step 3. Deposit Funds
Once you have chosen a fund to invest in, you must deposit funds with your broker. You can only make a purchase once you have deposited sufficient funds.
This step is usually relatively straightforward. However, you will need to check what transfer methods your broker allows. Some brokers accept debit and credit card deposits; however, some charge high transaction fees for using this option.
To deposit funds, navigate to your broker's deposit screen, insert the value of money you want to deposit and authorise the transfer.
Before making your deposit, consider how much money you want to invest. Ideally, you should only deposit the amount of money you want to invest in bond funds because you are unlikely to earn interest on any money you leave sitting idly in your account.
Step 4. Purchase Desired Funds
Once the money is in your investing account, you can start buying units in your preferred bond fund. Search for the bond fund you wish to invest in, add the amount of money you want to invest and authorise the trade.
After that, you can view the units of your bond fund on the portfolio screen.
Step 5. Monitor UK Corporate Bond Prices and Sell at the Right Time
Once the bond funds are showing in your portfolio, you must closely monitor them.
You should track price movements daily if you are an active, short-term investor. This is important if you want to sell your stake in the bond fund for a profit. Monitoring the performance of the funds daily means you will be ready to act when the price increases.
On the other hand, if you are a passive, long-term investor, you will not need to monitor price movements so closely. This will apply if you rely on receiving payments from the fund over an extended timeframe.
If this is the case, you probably won't be interested in selling the funds for a profit as soon as the price increases.
However, passive investors should still commit to keeping track of price movements. If the bond fund's price dips significantly and suddenly, it might be worth cutting your losses and selling up.
Corporate bonds are a type of debt security. They are a good choice for investors looking for ways to diversify their investment portfolio whilst avoiding high levels of risk.
To buy UK corporate bonds, you must set up an account with a brokerage offering investment in corporate bonds. Once you have an account, you can deposit and invest funds.
Investors holding corporate bonds are taxed at 20% on interest received on bonds. Nearly all types of bonds are taxable, aside from some government bonds.
Investors pay taxes on the income they earn on bonds. They also pay interest on the capital gain acquired if they sell it before it matures.
Corporate bonds are a type of debt obligation. When an investor buys corporate bonds, they effectively loan money to the company issuing the bond. After the transaction has been finalised, the company issuing the bond is legally obliged to pay interest on the principal investment.
In most cases, it is also required to return the principal investment when the bond matures. Some investors choose to sell the bond before maturity, especially if there is a significant increase in its value over the investment term.
The best UK corporate bond funds to buy include the iShares USD Treasury Bond 20+yr ETF, the Janus Henderson Strategic Bond Fund, the Lyxor Core UK Government Inflation-Linked Bond ETF, the SPDR Bloomberg High Yield Bond ETF (JNK) and the Vanguard Total Bond Market ETF.
Corporate bonds offer investors a regular stream of income. Usually, investors receive interest in their investments twice per year.
Suppose an investor holds onto bonds until maturity. In that case, they receive their entire initial investment back, so corporate bonds offer a useful way to preserve capital whilst building up an investment portfolio.
In most cases, corporate bonds pay interest on a twice-annual basis.
Some of the best UK stockbrokers to invest in corporate bonds include CMC Markets, Degiro and AvaTrade.
Investing in UK corporate bonds is less risky than stocks. They are graded according to risk and quality according to credit rating agencies. This is decided according to the financial position of the issuing company.
The overall level of risk depends on the corporate bond you choose to invest in. Some risks involved in this investment include company bankruptcy, losing the bond, liquidity and interest/inflation. As with any investment, you should only invest the money you can afford to lose.
When evaluating corporate bonds, it is vital to consider the price, interest rate and yield, date to maturity and redemption features. With this information, you can decide if a bond is suitable for your portfolio.
Stocks are ownership shares in a company. Corporate bonds are essentially ‘IOUs’ from the government or business.
There are also differences in terms of how they make a profit. To make a profit from stocks, the resale value of the stock must increase over time, whereas corporate bonds pay out a fixed amount of interest until they mature.
The value of corporate bonds is affected by factors such as the company credit rating, time to maturity and interest rates.
Corporate bonds are also impacted by inflation, economic growth and the yield curve. Investors must consider all of the information before investing in UK corporate bonds.
Final Thoughts
Buying corporate bonds is straightforward, but it is essential to do some research before choosing a broker.
Once you have found one that suits your needs, depositing and investing in your selected bonds is easy.
After that, you can begin earning a return on your investment. This happens in two ways – the coupon, which is paid out each year, and the value of the asset, which fluctuates over time.
For long-term investments, this can be achieved through ongoing monthly interest payments. For short-term investments, you can profit by selling your holdings after a price increase.
All investors should always be mindful of the risks associated with investing in corporate bonds UK and other types of investment. You should only ever invest money that you can afford to lose.
WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal capital.
