Another misunderstanding investors have relating to bonds is that a bond is issued and then goes away into the hands of investors, never to trade again. Most people do not understand that corporate bonds have an active and liquid secondary market, much like stocks. The difference is that the “bond exchange” is not a physical location like the New York Stock Exchange. Rather it is an electronic market created and maintained by large banks and investment banks.
These features apply to both high yield and investment grade bonds. And a benefit of this secondary trading is that bonds can in some cases be acquired at a discount to par, allowing for potential capital appreciation in addition to the income they provide.
The high yield bond market is a large, developed, and liquid asset class. Between the finite outcome, via the bond maturity, and the income and potential capital gains provided, we believe that this asset class should be considered as a core piece of a fixed income portfolio.
And with the advent of high yield exchange traded funds, all market participants have access to this asset class.
This article was written by Tim Gramatovich, CFA, Chief Investment Officer for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD)