Although Main Street is limping along with high unemployment, low consumer confidence and lackluster housing sales, investors are finding income in other places. One increasingly popular destination: junk bond exchange traded funds (ETFs).
According to Bank of America Merrill Lynch Index data, the percentage of distressed high-yield bonds dropped to the lowest level since April, reports Bryan Keogh for BusinessWeek. This development may make even more investors willing to take on the risk in such bonds.
The ratio of junk bonds with yields of 10% more than Treasuries dropped to 14.3% at the end of July from 15.8% in June. [PowerShares Changes Index on High-Yield ETF.]
Junk bonds are debt rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.
Last week, yields on junk bonds were 8.34%, down from 9% in early July, writes Dave Carpenter for Yahoo! Finance. In comparison, the 10-year U.S. Treasury yield was 3.05% as of last week and corporate bonds, with an average 3.8% yield, aren’t doing much better. [Junk Bond ETFs Are Anything But.]
However, there is a caveat. Junk bonds are more likely to default and their prices are closely tied to the corporations that issue them. Picking out individual junk bonds is more like speculation. That’s why investing in junk bond ETFs helps mitigate risk by holding a large pool of junk bonds within the fund’s portfolio.
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
- SPDR Barclays Capital High-Yield Bond (NYSEArca: JNK)
- PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEarca: PHB)
Max Chen contributed to this article.
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.