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.
In stock ETFs, dividend-paying strategies and sectors have been very popular. Some investors frustrated with measly bond yields are moving into these “defensive” stock ETFs. However, they introduce equity risks into a portfolio, and stocks are more volatile than bonds, generally.
SPDR Barclays Capital High Yield Bond ETF (NYSEArca: JNK)
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own JNK.