Investors shouldn’t write off high-yield fixed-income assets and related junk bond exchange traded funds just yet as an expanding economy will help support this riskier segment of the debt market.
“The reality is this economic expansion will likely continue for several more years, so with that as a backdrop we don’t see fundamentally the high-yield market at risk right now,” Mark Kiesel, PIMCO’s chief investment officer for global credit, said on CNBC.
While PIMCO does not anticipate a crisis in junk bonds anytime soon, Kiesel said the company is more conservative and is avoiding lower-quality, high-yield bonds.
“Within the high-yield markets, we are favoring those rising stars, those companies who are fundamentally improving,” Kiesel added. “So yes, you want to be conservative in the credit markets today but there is significant ways to add value through active management.”
For broad speculative-grade bond exposure, investors can take a look at the PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS), which comes with a 4.30% 30-day SEC yield. HYS includes a small 7.0% tilt toward lower investment-grade quality BBB, along with speculative grade BBB 31.9% and B 34.4%. [Junk Bond ETF Opportunities After a Major Sell-Off]
The PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB), which has a 4.35% 30-day SEC yield, also holds a larger position in higher quality junk-rated debt, including 15% BBB-rated, 59% BB-rated and 25% B-rated.
Alternatively, investors can also take a look at the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which has a 4.8% 30-day SEC yield. Fallen angels are corporate bonds that once held investment-grade credit ratings but, due to a variety of factors, were later downgraded to junk status. Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Furthermore, since these fallen angels were formerly on the cusp of investment-grade status, this group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds. Specifically, ANGL’s credit quality includes BBB 1.8%, BB 76.9%, B 13.6% and CCC 4.5%.
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.