Don't Overlook Junk Bond ETFs to Help Meet Income Needs

Fixed-income investors should consider incorporating a high-yield bond exchange traded fund to bolster yields and diversify a portfolio.

“Investing in the [Bloomberg Barclays US Corporate High Yield Total Return Index] may be an interesting option to consider for a long-term investor seeking to boost current income while gaining a strategic exposure to an asset class that better diversifies a portfolio of equities and lower-yielding bonds,” Eric Legunn, an ETF Strategist for Deutsche Asset Management, said in a note. “Investors concerned with a future downturn should be relieved to observe how well and how rapidly the High-Yield Index rebounded after the financial crisis (though past performance is no guarantee of future results).”

Over the short-term, Legunn argued that roll-down return, carry and price return due to changes in rates and spreads will affect bond returns. Currently, roll-down return is positive in today’s upward-sloping yield curve environment. The approximate carry or yield-to-worst as a proxy on the High-Yield Index is about 5.6%. Lastly, price return is affected by duration, and with a 3.8 year duration, the High-Yield Index could decrease by 3.8% if rates rise by 1% or vice versa.

Deutsche Asset Management projects a -1.8% index return due to the negative effects of rising rates on bond prices, but investors could potentially expect to a total return of about 3.8% over the short run after factoring in yields of 5.6%.

“Therefore, in today’s low rate environment, high-yield bonds may still be attractive for yield-seeking investors,” Legunn said.