High-yield, junk bond exchange traded funds provide fixed-income portfolios with that extra kick, but investors should not go overboard with their exposure.
Interest rates remain stubbornly low, with benchmark 10-year Treasury yields still hovering around 2.45%. Consequently, more investors are looking at junk bond ETFs, like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), which offer a 4.59% and 5.09% 30-day SEC yield, respectively.
Nevertheless, potential investors should remember that the more attractive returns come with greater risks. Specifically, these high-yield bond funds track speculative or junk rated corporate debt.
The bonds have also experienced more volatile swings. For the year ended July 2, high-yield bond funds attracted $3.2 billion in assets, reports John Wasik for the Wall Street Journal.
The positive sentiment soon soured as nervous investors pulled a record $7 billion out of junk-bond funds in the week ended August 13 – more money was pulled out of the bond funds in that single week than total inflows for most of the year. In the week ended August 20, investors rushed back in, piling $2 billion into junk bonds.
Due to their riskier nature, financial experts advise investors to keep junk bonds at no more than 5% of an income portfolio.