Blumenthal writes that short-term options are the best way to guarantee that the money you put in will be given back later. For long-term and intermediate-term investors, intermediate-term and high-yield funds might work fine over time. If interest rates rise, bond prices will crumble, hurting intermediate-term bonds if you need the money sooner rather than later.

If interest rates rise quickly, then longer-term bond  ETFs can serve a portfolio well. (How bonds can be part of your investment strategy).

While high yields are great, consider other factors before diving in. The fund should be right for you, your goals and your time horizon. As with any ETF type, it’s also wise to employ a strategy of exit and entry when buying and selling bond funds. (When it’s time to exit bond ETFs).

For more stories about bond ETFs, visit our bond category.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 32.8% year-to-date; yields 12.5%

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): up 24.5% year-to-date; yields 9.8%

Worldwide, investors have purchased more than $2.7 trillion of new corporate bonds this year, reports Kate Haywood for The Wall Street Journal. Contrast that with $1.7 trillion in 2008, which is when the financial crisis all but brought the flow of cash to a standstill. (Why junk bonds are in demand).

Junk bond issuers have used about 75% of proceeds from sales to refinance existing debt, the highest proportion since record-keeping began in 1996. Corporate bond sales have been a boon to many companies, giving them a lifeline as they wait for banks to resume normal lending.

“Junk,” or high-yield, refers to a bond rated “BB” or lower because of a high default risk. The main reason junk bonds have had a good year is simply that investors have some risk appetite to spare again, explains Matt Krantz for USA Today. (Other types of bonds that have done well in this market).

After the terror of the March pullback and the major market meltdown leveled off this year, investors began to put their money into investment-grade and junk bonds and took a step back from the safety of government debt.

While junk bonds have higher risk, they will do fine so long as investors risk appetite is steady. If the economy doesn’t heal or if companies increasingly default on their debt, you could find yourself suffering large losses. (When is it time to exit the bond market?)

What can you do about it? Have an exit strategy when the trend turns. (Why stop losses matter).

For more stories about bond ETFs, visit our Bond category.

A sample of such ETFs:

• SPDR Barclays Capital High Yield Junk (NYSEArca:JNK): up 30.9% year-to-date

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): up 24.4% year-to-date

• Vanguard Total Bond Market (NYSEArca: BND): up 3.8% year-to-date

The number of ETFs available in the market may be confusing, but there are so many choices that investors can customize their portfolios according to their personal preferences and strategy. The ultimate goal is usually the same (to make money), there are two primary categories investors fall into: those who use a fundamental strategy and those who prefer a sector strategy, explains Don Dion for TheStreet. We throw in a third strategy below, too.

Fundamental Strategy: Fundamental ETF portfolios are suitable for investors looking to take advantage of the cost efficiency and tax efficiency of ETFs over an extended time period. These portfolios are usually not traded very often and provide exposure to the broad market while meeting their needs for income.

Investors who find this strategy appealing often cite taxes as the primary lure.

• iShares Dow Jones Select Dividend Index (NYSEArca:DVY): up 4.8% year-to-date

• PowerShares QQQ (NYSEArca: QQQQ): up 42.9% year-to-date

Sector Strategy: A sector ETF strategy is designed to actively capture market trends. Some prefer  a momentum-based strategy to indicate the best times to enter and exit funds. ( The strategy you choose is just as important as the approach). These portfolios are considered active, as they are traded and monitored constantly.

• iShares iBoxx $ High Yield (NYSEArca: HYG): up 23.8% year-to-date

• PowerShares DB U.S. Dollar Bullish (NYSEArca: UDN): up 8.1% year-to-date

A Blend Strategy. We use trend following by monitoring the 200-day moving average in order to find those areas that are moving. By getting in and out of the market at set signals, you give yourself the opportunity to be in the markets for any potential long-term uptrend. The stop loss enables you to put a cap on your losses. The benefit of relying on market signals to determine where and when you invest also removes the “noise” that emotions can generate and cloud your judgment. Any ETF works with this strategy, whether it’s a broad-based, plain-vanilla fund or a more exotic, niche ETF. (How to get in on the rebound).

Always do some research on what you are implementing and consider the liquidity, underlying stocks and pricing taking place in the ETFs you choose.

For more stories about trend following, visit our trend following category.

On the one hand, sterling corporate bond prices have been rising. This has been pushing yields down, causing some to second guess whether corporate bonds are the place to be. (More on the corporate bond ETF wave). If this turns out to be the case, then a massive selloff could result, states Matthew Vincent of The Financial Times.

However, analysis of corporate bond spreads tells a different story. Spreads, better known as the difference between the yields on corporate bonds and on safer government bonds,  widened to record levels after Lehman Brothers collapsed last year.

Corporate bond prices fell rapidly in anticipation of widespread defaults by other issuers. This pushed the effective yields from bonds’ fixed-income payouts up toward double figures, suggesting that they are not overbought.  To add icing to the cake, it appears that supply for these bonds, in particular the more risky junk bonds, cannot keep up with demand. (What you should know about junk bond ETFs).

An easy way to access the junk bond market is through the following ETFs:

For more stories on bond ETFs, visit our bond ETF category.

• iBoxx $ Liquid High-Yield (NYSEArca: HYG): up 22.2% year-to-date and has a yield of 9.9%

• PowerShares High Yield Corporate Bond (NYSEArca: PHB): up 18.1% year-to date and has a yield of 9.3%.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 31% year-to-date and has a yield of 12.4%

Kevin Grewal contributed to this article.

Neuberger Berman LLC Managing Director Thomas P. O’Reilly sees that individual investors turned to high-yield bonds for “competitive returns with better downside protection” than equities, despite economic uncertainty, writes Douglas Appell for Investment News. Ann H. Benjamin, managing director with Neuberger Berman, says high-yield bonds tend to outperform equities during slow economic growth.

Some market watchers note, however, that a bearish economy will likely lead high yields to underperform investment-grade corporate bonds. (Read about how bonds fare vs. stocks).

Investors could buy individual bonds, but high-yield bond ETFs are an easy, low-cost alternative for diversifying an investment portfolio, remarks John Jagerson for Learning Markets. Potential investors should keep in mind that bonds may lose value when markets dip. Rising interest rates and inflation both affect bonds.

High-yield bonds are classified as below investment-grade, with higher risk of default or non-payment. Junk bonds usually pay 7% to 10% more than yields provided by 10-year Treasury notes.

For more information on high-yield bonds, visit our high-yield bonds category.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 31.8% year-to-date; yields 12.4%

• iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG): up 23.4% year-to-date; yields 9.78%

• iShares iBoxx $ Investment-Grade Corporate Bond (NYSEArca: LQD): up 7% year-to-date; yields 5.3%

Max Chen contributed to this article.

For full disclosure, Tom Lydon’s clients own LQD.

Tom Lauricella of The Wall Street Journal suggests that in general, investors have tended to pay more for bond funds than the portfolios are worth.  He dissects the Vanguard Total Bond Market ETF (NYSEArca: BND), which is up 4% year-to-date.

Since its launch in April 2007, the ETF’s daily closing price has been equal to or above the net asset value (NAV) — or the per-share value of its holdings — 98% of the time, and 36% of the time by a meaningful 0.5% or more. Additionally, Lauricella states that the gaps typically have been much wider for municipal-bond and corporate-bond ETFs, especially those holding low-rated “high yield” bonds.

This also highlights the issue of “index drift.” This was recently seen in the SPDR Barclays Capital High Yield (NYSEArca: JNK). It fell nearly 1% in the year ending Aug. 31 as its benchmark rose 6%. One problem was that the ETF couldn’t get some lower-quality bonds held in the index. Bond ETF providers are aware of the challenges in building bond ETFs, and strive to build them so that their ETFs work optimally.

This hasn’t hurt the popularity of bond ETFs, and they’ve gotten more than half of new cash flowing into ETFs, reports Eleanor Laise for The Wall Street Journal.

This could be because the funds are an immensely easy and efficient way to access what can be an expensive market. They offer the kind of diversification that could be cost-prohibitive otherwise.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

Standard & Poor’s commented that issuers are favoring the high-yield bond market over the leveraged loan market, with 86% of speculative-grade debt in bonds during the first nine months of the year compared to 45% in the same period last year, reports Tess Stynes for The Wall Street Journal.

Issuers are seeking the less restrictive terms and longer maturities offered in bonds. Though, high-yield debt does come with higher financing costs when companies try to refinance. (To read more about using bond ETFs, go here).

Some analysts fear that a new bubble may be forming on Wall Street as investors chase down returns, and some are warning that the hike in bond prices may roll back if the economy stumbles and investors run back to safer investments, writes Jack Healy for The New York Times. Struggling companies would then be forced to pay higher rates to take on more debt or refinance old bonds. (Read more about protecting yourself from bubbles here).

Longtime analysts and fund managers are amazed by the investor interest in bonds this year. The risk premium of bonds over Treasuries, or “spread,” dropped to 7.5% from more than 16% in the beginning of the year. Bond yields are above their historic averages, however.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 28.6% year-to-date ; yield is 12.9%

• iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG): up 20.3% year-to-date; yield is 10.5%

For more information on junk bonds, visit our junk bonds category.

Max Chen contributed to this article.

Dena Aubin for Reuters explains that risks of continued high defaults and massive refinancing needs of many corporate borrowers are keeping credit spreads high, especially on high-yield bonds. This signals that the economy isn’t exactly in the clear.

Bond prices are still priced for “near recession,” one researcher says. Spreads reflect a default rate of 9%, which the researcher says would put growth in the 0% to 1% range.

High unemployment rates and consumer debt may keep the economy anchored for awhile longer, and economists polled by Reuters last week said the economy is recovering more strongly than previously expected. Next year, however, could be lackluster and risks of a double-dip downturn remain.

Spreads would typically have to reflect a default rate more within the normal range of about 5% to signal an economy growing more than about 1.5 %, according to one analyst.

• SPDR Barclays Capital High Yield Bond (JNK): up 23.5% year-to-date



• iShares iBoxx $ High Yield Corporate Bond (HYG): up 16.1% year-to-date

For more stories about jubk bonds, visit our bond category.

The vast array of bond ETFs enable investors to grab exposure to international Treasuries, emerging market debt, Treasury Inflated Protected Securities (TIPS), convertibles and mortgage-backed securities.  You get the point – just about every aspect of fixed income has been covered by ETFs, giving investors the opportunity to diversify and reap the risk-reward benefits that traditionally come from equities, state Matt Hougan and Dave Nadig of Index Universe.

But…do they work?

• Opponents of bond ETFs suggest that the premium or discount that they trade at from their underlying net asset value (NAV) is what deters them from trading them.
• Advocates suggest that this characteristic is what enables investors to know the true value that one is willing to put on a basket of bonds.

Bond indexes aren’t set up like stock indexes. Bonds tend to trade just a few times each day, and there are some that may go days without trading. For that reason, bond indexes are calculated by using a combination of “actual bond trading prices and best-guess synthetic prices,” received from bond-pricing services.

It’s important to be mindful of the risks in bond ETFs. If the underlying holdings aren’t liquid (such as what happened with the iShares iBoxx High Yield Bond (HYG) ETF at the height of the credit crisis), it could cause the fund to drift from the NAV.

All that being said, bond ETFs do work as they should, and they can be a valuable component in any portfolio as long as investors understand the risks. Not all bonds and bond ETFs are created equal.

Meanwhile, bonds are as popular as ever. John Spence for The Wall Street Journal notes that bond ETFs accounted for 63 funds and $78 billion of the assets. Many expect this segment of the market to go through a major growth spurt now that PIMCO and others have entered.

For more stories on fixed income, visit our bond ETFs category.

Kevin Grewal contributed to this article.

Those businesses representing the biggest risk are the ones that are really basking in the glow of July’s rally in the S&P 500.

The winning stocks have been the companies with a rating of BB or lower, also known as “high-yield junk,” explain Jennifer Alban and Rodrigo Campos for Reuters. Shares prices for junk companies are up between 21%-29% as of Aug. 4. By comparison, investment-grade companies with a BBB rating and higher are up 9.5%-19.25% for the same period.

Part of the reason for this rally is that the most beaten-down areas and sectors tend to have the furthest to go in a recovery. Companies with high credit ratings have a tendency to weather challenged markets better, so when a rally takes place, they usually don’t skyrocket.

Some analysts believe that the recent junk rally can’t sustain itself unless higher quality companies join in on the growth sooner rather than later. The higher-rated companies have less growth potential, though, so their earnings prospects may need more time to kick in.

Have a strategy and a stop-loss in place to protect yourself when the trend shows signs of ending.

In the meantime, here are some ways you can get this exposure with ETFs:

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 10.2% year-to-date

• iShares iBoxx $ Investment Grade Corporate Bond (LQD): up 0.7% year-to-date

• SPDR Barclays Capital High Yield Bond (JNK): up 24.7% year-to-date

For full disclosure, Tom Lydon’s clients own shares of LQD.

For more stories about bonds, visit our bond category.