For those who fancy bonds as the preferred investment tool, the most common quandary would be in deciding which type of bonds, along with related exchange traded funds (ETFs), are most suited to one’s needs.
One eye-catching asset class for intrepid investors is in high-yielding corporate bonds, writes Chance Carson for Seeking Alpha. High-yield bonds, also known as junk bonds, are debt instruments issued by corporations with BBB or lower credit ratings. Interest rates on high-yield debt currently exceeds Treasury bond yields by 18 to 20%. ETFs that provide a glimpse into the world of high-yield bonds include:
- iShares iBOXX $High Yield Corporate Bond (HYG): down 6.9% in the last month; yields 10.6%
- PowerShares High Yield Corporate Bond (PHB): down 10.7% in the last month; yields 12.9%
- State Street’s SPDR Lehman High Yield Bond (JNK): down 6.5% in the last month; yields 13.6%
It should be noted that along with high yields comes a higher risk of default by the issuer. Forecasts put high-yield bond defaults in 2009/2010 around 15%. It is important to understand one’s own risk tolerance since some may have a higher, or lower, level of tolerance for risk.
Another ETF type that provides a blend of Treasury bonds and corporate bonds includes asset classes of Treasury and agency bonds (around 37%), mortgage-backed securities (38%), and investment-grade corporate bonds (25%). These ETFs try to replicate the Barclays Capital U.S. Aggregate Bond Index:
- iShares Barclays Aggregate Bond (AGG): down 3.2% in the last month; yields 4.6%
- Vanguard Total Bond Market ETF (BND): down 1.4% in the last month; yields 4.6%
- SPDR Barclays Capital Aggregate Bond (LAG): down 3.3% in the last month; yields 4.4%
Lastly, investors looking for a 100% investment-grade corporate bond can peruse iShares iBoxx $ Invest Grade Corp Bond (LQD), which is down 2.7% in the last month and yields 5.6%
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.