How to Cope With Junk Bond ETF Risk | ETF Trends

As Treasury bond yields do the limbo, corporate bond exchange traded funds (ETFs) are proving to be an irresistible lure for yield-starved investors.

In the first nine months of this year, junk bond sales busted the record set for all of 2009 by more than 25%. But are investors taking on more risk than they’d ordinarily put up with?

High-yield bonds issued three or four years ago would normally be contributing to higher default rates about now. These days, even  below-investment-grade companies, which might have had trouble rolling over debt in a weak economic recovery, have been able to refinance and even extend their obligations at favorable terms, says Kent Grealish, CFP and a partner in Quacera, a registered investment advisory firm in San Bruno, California, for Index Universe. [Bond ETFs: The Tech Bubble Again?]

As the “safe” investments are paying next to nothing, the fixation on getting a higher rate of return has created a kind of desperation among otherwise risk-conscious investors. Nonetheless, investors are obsessed with yield and gaining something on their portfolios, rather than how much they can gain. [Junk Bonds and the Shrinking Default Rate.]

Will today’s obsession with yield turn out badly? Is it just another form of performance chasing? You can protect yourself in a couple of ways: one is to have a strategy (here’s what we use); the other is to sign up for alerts to be notified via email of a trading opportunity in any ETF.

  • iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
  • SPDR Barclays Capital High-Yield Bond (NYSEArca: JNK)
  • PowerShares Fundamental High Yield Corporate Bond (NYSEArca: PHB)

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

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.