Some investors looking to boost income are turning to high-yield exchange traded funds and other ETFs that invest in riskier bonds and alternative fixed-income sectors. As always, investors need to remember that higher yield usually means higher risk.
It’s understandable that some investors are reaching for yield with Treasury bonds, CDs and bank accounts offering such paltry yields. Furthermore, the Federal Reserve appears committed to keeping interest rates ultra-low for several more years. [Regulator Warns on ‘Yield Chasing’]
When investing in high-yield bond investments, people tend to focus on potentially higher volatility within the investment prices and the risk of default. However, since ETFs hold a large bundle of securities, any negative effects from defaults is largely diminished. [Investors Flocking to Emerging Market, High-Yield ETFs]
Most ETF providers disclose the credit worthiness of their bond holdings on their websites, an investor may judge whether or not he or she is willing to take on the exposure. Debt obligations with a bond rating of BB/Ba or lower are defined as “junk bonds” or “below-investment grade.”
Still, the funds may experience volatility associated with the macroeconomic fundamentals in the related markets. For instance, capital appreciation in international or emerging market dividend and bond ETFs will still reflect fundamental factors that affect global economies or region specific factors.