Junk bond exchange traded funds provide attractive yields, but the asset class category exposes investors to specific credit risks.
The yield on speculative grade debt depends on the time horizon for when the bond is repaid and the creditworthiness of the issuer, writes John Waggoner for USA Today.
As a junk bond, the debt security is rated from BB to D, or default. Anything rated BBB and above is considered investment grade.
Speculative grade debt has been popular in a low interest rate environment as a high-yield option for income investors, despite the greater risk of defaults. [High-Yield Bond ETFs and Rising Rates]
“The economy is OK, autos and housing are good,” Mark Durbiano, manager of Federated High Income Bond, said in the article. “They have a lot of cash flow, and there’s nothing crazy on the balance sheet side.”
This debt category has been holding up as interest rates inched up this year – junk bonds are correlated to stocks and do well in an improving economy.
“If you think there’s going to be a recession or an equity market bear market, don’t buy high yield,” Durbiano added. “If you think the economy is OK, high yield is where you want to be.”