By Andrew Bary

For investors put off by private credit, there are high-yielding alternatives without the baggage.

These include junk-bond funds and leveraged-loan funds that can carry double-digit yields -- comparable to those offered by the business development companies that invest in private credit.

The junk and leverage-loan funds carry annual fees of 1.5% or less annually based on net assets, compared with annual fees as high as 5% or 6% on private-credit funds.

Some of the higher yields are available on closed-end junk-bond and leveraged-loan funds like the BlackRock Corporate High Yield fund and Nuveen Floating Rate Income fund that use leverage to boost their yields.

For those wanting to take on less risk, there are leverage-loan exchange-traded funds like Invesco Senior Loan, the largest in the category at $6.5 billion, that yield about 7%. The Invesco fund doesn't use leverage.

Before we dive into the details, here's a quick primer on the high-yield market. There are three main buckets totaling about $1.5 trillion each: the junk-bond market, the leveraged or broadly syndicated loan market, and the private-credit market.

Junk bonds have been around for decades, while the broadly syndicated loan market and private credit are newer.

Broadly syndicated loans, generally originated by banks, are similar to private-credit loans because both go to speculative-grade companies and typically carry floating rates tied to the Secured Overnight Financing Rate, or SOFR, the short-term yield benchmark now around 3.7%.

The differences are that broadly syndicated loans are tradable, unlike private-credit loans, and go to larger companies that include American Airlines Group, Bausch + Lomb, and Hertz Global Holdings. Elon Musk's X, formerly Twitter, recently paid off one of the largest leveraged loans.

The average size of companies that borrow in the broadly syndicated loan market is about $5 billion. Private-credit loans, meanwhile, generally are made to midsize companies taken private in leveraged buyouts and valued at an average of $1 billion.

Pricing of broadly syndicated loans is set in the market, while private-credit loans are valued by fund managers. This gives broadly syndicated loan investors comfort about pricing accuracy.

"When I talk to financial advisors, one of their concerns about private credit is portfolio marks. They don't have confidence in pricing," says Jason Bloom, Invesco's head of Fixed Income ETF Strategy. The broadly syndicated loan market is much more liquid, with pricing available throughout the trading day, he says.

Another plus with broadly syndicated loans is that they normally are the most senior debt obligations of a company and have a higher credit standing than junk bonds, which generally are unsecured. Private-credit funds often mix senior secured debt with more-junior obligations and equity.

Historical broadly syndicated loan default rates have been about 3% annually, but investors can get substantial recoveries given the seniority of the debt.

Private-credit BDCs come in two flavors -- publicly traded BDCs like Ares Capital and Blue Owl Capital, and private BDCs led by Blackstone Private Credit Fund. In this universe, Barron's has favored investing in the public funds that trade for average discounts of close to 25% of their year-end net asset values.

The advantage of junk and leveraged-loan funds are greater pricing transparency, lower fees, and better-known borrowers.

Many closed-end funds also trade at discounts to NAV. The BlackRock Corporate High Yield fund, the largest in the space at $2 billion, now trades at about $8.60 a share, a 7% discount to its portfolio value.

Its current yield is 11%, although about 25% of that yield is a return of capital, an unfortunate practice among closed-end funds of paying back part of fund assets as "income" when it really isn't. After adjusting for this return of capital, the true income yield is close to 8%.

One fan of the closed-end junk and leveraged-loan sector is Eric Boughton, co-manager of the Matisse Discounted Bond CEF Strategy, a mutual fund that buys cheaply valued closed-end funds.

He points to the discounted prices on the funds. "Not only are the portfolios of these CEFs marked to market daily, but there is a wider than normal discount on top of the depressed net asset value." The Matisse fund owns the Nuveen Floating Rate Income fund.

The closed-end funds use leverage, which magnifies returns up or down. The leverage is often in the 25% to 40% range, meaning 25 to 40 cents of borrowings for every dollar of investor equity. That compares with about a dollar of debt for each dollar of equity at private-credit BDCs, making them more risky if the credit environment deteriorates.

Portfolio manager Scott Caraher of the Nuveen Floating Rate Income fund says leveraged loans now yield 6% to 10% for most borrowers, with the riskiest loans with low-junk grade triple-C ratings as high as 20%. The Nuveen fund, he says, seeks to provide ample income and some appreciation potential by purchasing discounted loans.

That's the goal of most junk-bond and leverage-loan funds: nice yields and the comfort of accurate portfolio valuations.

Write to Andrew Bary at andrew.bary@barrons.com

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April 17, 2026 03:00 ET (07:00 GMT)

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