High yield bonds - or, less glamorously, junk bonds - or, more precisely, non-investment grade bonds - pay very high interest rates. They need to, because they have been issued by financially troubled companies. People are only willing to buy the bonds if they pay a much higher interest rate than bonds from companies whose finances are solid. The fear is that the issuer will default on the debt and file for bankruptcy.
In recent years, the world's low interest rate environment has left many investors hungry for healthier returns on their money than government bonds or CD accounts can provide. Some have tried trading stocks for a living, while an increasing number of investors have turned to purchasing high yield bonds.
Historically, the majority of companies which issue high yield bonds do not default forever on the debt. Therefore, by owning a large number of junk bonds, in theory you can spread the risk that a proportion of the companies will go bust. Hence you might be able to obtain an above average return. A high yield bond ETF is a very convenient way to invest your money in this type of situation.
For example, your high yield bond ETF might invest in junk bonds paying an average annual return of 10 percent. In any given month, if 10 percent of companies default on their interest payments, the annual return will still be 9 percent. (In fact, in January 2010, almost 11 percent of junk bonds defaulted on their interest payment.) Provided a large number of companies don't default completely and go bust, the returns look enticing. Seasoned investors will remind you, however, that there are plenty of times when things that should have been profitable in theory have proved the opposite in practice.
A high yield bond ETF allows investors to buy an investment which exposes them to the high yield corporate bonds issued by a large number of companies. If things go right you get a high interest rate (interest rates can approach double digits) AND a big capital gain because the value their bonds rises strongly when troubled companies get back on an even keel.
Most financial advisors don't advise their clients to put a large part of their assets into high yield bond ETFs - no more than five or ten percent of your portfolio would be typical advice - and only money you can afford to lose. Management fees of passive high yield bond ETFs should be about 0.5 percent a year. If you invest in an actively managed ETF, expect to pay higher fees.
Ideally, if you have your heart set on investing in a high yield bond ETF you should invest in an ETF which holds bonds in a very large number of companies in different sectors and in different geographical locations.