Be Careful When Reaching for Yield with ETFs | ETF Trends

One of the key lessons of the credit crisis and the subprime-mortgage meltdown was that investors can unknowingly add huge risks to their portfolios when digging for just a little extra yield.

ETF sponsors are launching products sporting higher payouts or tracking exotic asset classes for investors willing to take on the risk, investment researcher Morningstar points out. Yet it is cautioning investors against reaching for income in a low-yield environment for bonds.

“Many investors have been making up for low yields by taking on more risk, whether it’s by dipping into lower-quality bonds or holding more dividend-paying stocks,” ETF analyst Samuel Lee writes.

Investors were recently reminded of the risks of ETFs that hold high-yield corporate bonds, or “junk.” [High-Yield Plunge Rattles Nerves]

“By seeking higher yields and greater risk, investors are likely setting themselves up for lower risk-adjusted returns and possibly worse absolute returns than if they had stood pat,” Lee wrote.