Following last week's sharp sell-off in risk assets, investors have sought refuge in safer assets such as U.S. Treasury bonds. As a naturally more volatile segment of the fixed income market, high-yield (HY) bond spreads have widened by 92 basis points relative to Treasuries since April 2, 2025, "Liberation" Day." However, the sell-off hasn't been uniform across the HY spectrum. BB-rated bonds—considered the higher-quality tier within the HY space—saw spreads widen by 73 basis points, while the more speculative CC-rated bonds experienced a significantly steeper widening of 153 basis points.

Figure 1: Option-Adjusted Spread (OAS)

For many investors, fixed income plays a supporting role in their portfolios—not as a primary driver of returns, but as a source of diversification and stability during periods of market stress. That's why maintaining a quality bias within a fixed income allocation is so important. In this piece, we'll take a closer look at the WisdomTree U.S. High Yield Corporate Bond Fund (QHY) and explore how its focus on higher-quality bonds, relative to both its peers and the broader Index, has contributed to its performance.

Higher Quality When It Matters

QHY has historically maintained a higher allocation to higher-quality bonds—and that's by design. Our investment approach, grounded in both fundamental and quantitative analysis, is intentionally structured to avoid lower-quality, potentially riskier issuers. As of the end of Q1, QHY held an over-weight position of approximately 9% in BB-rated bonds while remaining under-weight in lower-rated segments such as B and below.

Figure 2: Ratings

This emphasis on higher-quality bonds has been reflected in QHY's performance. Year-to-date, and since April 2, 2025, the Fund has outperformed the Bloomberg US Corporate High Yield Index by 62 and 10 basis points, respectively.

Figure 3: Relative Performance

A Timely Change

In our most recent rebalance (November 2024), we introduced equity return momentum as an additional factor to complement and enhance the long-term free cash flow signals in our model. This momentum metric evaluates a bond issuer's equity performance against other public issuers in the U.S. high-yield corporate debt universe. These momentum scores are then combined with the issuer's fundamental metrics to refine the bond selection process. The primary goal of this enhancement was to gain a timelier view of an issuer's financial health—and to further elevate the Fund's overall quality by identifying and excluding potential problem issuers before their fundamentals begin to weaken. A rough estimate suggests this change has contributed more than nine basis points in additional performance versus the previous methodology, underscoring the quality boost provided by incorporating momentum.

Figure 4: Momentum

Conclusion

In times of market stress, weaker issuers tend to get hit the hardest. That's where a steady focus on quality can make a real difference. QHY has shown how a thoughtful mix of fundamental research and timely quantitative insights—like the recent addition of equity momentum—can help it steer clear of the riskiest issuers. By tilting toward higher-quality bonds, QHY has delivered a better performance through recent volatility. For investors looking to stay invested in high yield without taking on unnecessary risk, a quality-focused approach like QHY may offer a more resilient way forward.