Income seems to be in short supply these days, so wherever exchange traded fund (ETF) investors can get it, that’s where they’re going. One such hot spot is junk bond ETFs.
In that search for income, be careful. John Spence for MarketWatch reports that investors need to be wary of the higher risk in “junk” bonds:
- They often have price swings that are bigger than in other bond ETFs
- They also trade at premiums to their net asset values (NAVs). [Why Junk Bond ETFs Are Better Than Junk Bonds.]
- Ben Baden for U.S. News and World Report says that high-yield bonds, usually rated BB or lower, are considered risky because the issuers have a higher probability of defaulting on their debt than those with better ratings. [Why Junk Bonds Are Anything But.]
We believe high-yield bond funds are one asset class to watch over the next year or so. This is an opportunity or maybe a trade where you can move into something that’s going to produce higher income. In this market, it’s tough to find a decent yield, because most investments are currently paying very little (10-year treasuries currently yield less than 3%).
Given last quarter’s strong corporate earnings and lower default rates among companies, high-yield bond funds could be an attractive alternative.
For more stories about corporate debt, visit our corporate bond ETF page.
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
- SPDR Barclays Capital High-Yield Bond (NYSEArca: JNK)
- PowerShares Fundamental High Yield Corporate Bond (NYSEArca: PHB)
Tisha Guerrero 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.