It’s hard to deny the appeal of an exchange traded fund (ETF) yield that’s sitting solidly in the double-digits, especially now that interest rates are at historic lows. But these high yields could be luring some investors to take on more risk than they’d otherwise be comfortable with.The latest short-term interest rates are at all-time lows, causing investors to seek performance in intermediate-term, mortgage-backed and other relatively risky bond funds for a better return, Karen Blumenthal for The Wall Street Journal writes . Jon Short, managing director at PIMCO, said that investors may want to focus more on return of capital rather than return on capital. (More information on bond ETFs).
Blumenthal writes that short-term options are the best way to guarantee that the money you put in will be given back later. For long-term and intermediate-term investors, intermediate-term and high-yield funds might work fine over time. If interest rates rise, bond prices will crumble, hurting intermediate-term bonds if you need the money sooner rather than later.
If interest rates rise quickly, then longer-term bond ETFs can serve a portfolio well. (How bonds can be part of your investment strategy).
While high yields are great, consider other factors before diving in. The fund should be right for you, your goals and your time horizon. As with any ETF type, it’s also wise to employ a strategy of exit and entry when buying and selling bond funds. (When it’s time to exit bond ETFs).
For more stories about bond ETFs, visit our bond category.
- SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 32.8% year-to-date; yields 12.5%
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): up 24.5% year-to-date; yields 9.8%
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.