A major investment theme has continued into 2012 — individuals and money managers are seeking yield in a low interest rate environment. Investment-grade corporate bonds and select high-yield corporate bond exchange traded funds are offering investors nice yields without some of the risks associated with equities.
High-yield or “junk” bond ETFs have been wildly popular this year with investors frustrated by razor-thin Treasury yields. [High Yield ETFs See Big Inflows in 2012]
“Corporate bonds are denoted as ‘high yield’ for the sole reason that firms issuing them are highly leveraged. Companies with this kind of leverage profile can get there either intentionally, as the result of a leveraged buyout, leveraged acquisition or recapitalization, or unintentionally because of a deterioration of the underlying business of an erstwhile investment-grade firm,” John Gabriel wrote in a fund analysis on Morningstar. [High Yield Bond ETFs Climb to Post-Crash Peak]
As far as credit markets, one of the areas that is known to have attractive yield with moderate risk is the investment grade corporate bond space. T. Dale of Security Ballew Wealth Management says that an investor can expect to make anywhere from 4% to 7% on annualized coupons, much better than what Treasuries are offering.
Corporate bond ETFs can give investors well-rounded exposure without the unnerving volatility that is associated with investing in equities, reports Kate Stalter for Minyanville. The rising prices of bonds can offset the falling prices on equities, giving a portfolio the right diversification. [ETF Chart of the Day: High-Yield Corporate Bonds]
Furthermore, the lower interest rates that are typical of a recessionary environment are offset if a portfolio has a fair mix of bonds and equities. ETFs offer investors an easy way to access a few corporate bonds in one shot rather than shopping around for individual bonds. [Investors Flocking to Emerging Market, High-Yield ETFs]
Corporate bond ETFs include iShares GS InvesTop Corporate Bond Fund (NYSEArca: LQD), a fund that owns corporate bonds with intermediate-term durations. The yield is about 4% currently.
For a riskier bet, but a nearly 7% yield reward, the iBoxx Investment Grade Corporate Bond Fund (NYSEArca: HYG) offers investors the largest portfolio of high yield bonds.
Tisha Guerrero contributed to this article.