In troubled times, investors are on the hunt for safe havens, and one of those is bond exchange traded funds (ETFs). There is always the concern about interest rate risk, but with the possibility of further rate cuts by the Federal Reserve, short-term threats should be small.
If that’s the case, State Street’s SPDR Lehman High Yield Bond (JNK)
has come at the right time, and the timing is purely coincidental, says
State Street’s Senior Managing Director Tony Rochte. Launched on Jan.
28, it tracks the Lehman Brothers U.S. High Yield Very Liquid Index.
Rochte says that the ETF came out of a feeling at the firm that the
ETF bond market is probably underrepresented. "There’s $600 billion in
the U.S. ETF industry, and $35 billion in fixed income. That’ll be a
major focus, not of the industry, but of what we’re doing here."
JNK is the latest fund in State Street’s relatively new line of
fixed income and international ETFs, almost all of which were launched
in 2007. It’s part of State Street’s push over the last 18 months to
rebrand itself.
Thomas Anderson, State Street’s Head of ETF Research, says they’re
particularly excited about the newest ETF because it tracks the Lehman
High Yield Index. "The ETF and the index give you the purest exposure
to broad high-yield asset classes," he says. Another selling point of
the ETF is its low expense ratio: 0.40%, compared with the 0.50% of the
two other high-yield ETFs.
High yield bonds are especially appealing right now – they’re
currently yielding in the 10% range, compared with the 3.5% range with
the 10-year treasury bond. But higher yield equals higher risk. After
all, "high yield" is another term for "junk bond."
"It’s important that people understand what they’re buying for any
investment. When you’re buying a high yield bond, you’ve got to realize
that you’re getting high yield because they’re low-rated. They’re
non-investment grade," Anderson says.
On the "risk" spectrum, though, junk bonds fall somewhere in the middle, between bonds and equities.
But an investor can lower that risk by making high yield bond ETFs a
smaller part of his or her portfolio. "When you make this 5-10% of your
portfolio, the risk gets spread out in that portfolio setting," says
Anderson.
JNK is in addition to two other high-yield bond ETFs: iShares iBOXX $High Yield Corporate Bond (HYG) and the PowerShares High Yield Corporate Bond (PHB), which tracks the Wachovia High Yield Index.
A comparison of the three, courtesy of Index Universe:
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.