Risk tolerance could be rising again after a strong market rally during the month of July. While stock market indexes have been climbing, so have bond prices, and July also saw a marked increase in flows for high yield bond funds.
Yields have been climbing for most of the year as the U.S. Federal Reserve pushed rates higher in an effort to keep inflation down. As market confidence returns, so have investors in high yield bond funds.
“After a rocky start to 2022, U.S. high-yield bond funds received an estimated $6.8 billion in net money in July, according to data from Morningstar Direct,” a CNBC report said. “While yields have recently dipped to 7.29% as of Aug. 10, interest is still higher than the 4.42% received in early January, according to the ICE Bank of America U.S. High-Yield Index.”
Nonetheless, investors must still understand the risk of high yield bonds. With market uncertainty still remaining, especially with the possibility of a recession amid slower growth due to rising rates, investors should exercise a degree of caution with high yield bonds given their higher risk of default.
“It’s a shiny metal on the ground, but all shiny metals are not gold,” said certified financial planner Charles Sachs, chief investment officer at Kaufman Rossin Wealth in Miami.
2 Alternatives to Bond Funds
Rather than opt for bonds, investors can opt for other income opportunities. One route is via dividend-producing stocks in an exchange traded fund (ETF) wrapper using the Vanguard High Dividend Yield Index Fund ETF Shares (VYM).
As mentioned, dividends are an alternate route to high yield debt with ETFs like VYM. The fund employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that generally are higher than average.
The advisor attempts to replicate the target index by investing all, or substantially all, of their assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund comes with a low expense ratio of 0.06%.
Another option seeks dividend income opportunities globally in the Vanguard International High Dividend Yield ETF (VYMI). The fund also comes with a cost-effective six basis point expense ratio.
VYMI offers an all-in-one option, allowing investors to navigate the international debt markets without needing to pore over copious amounts of financial data to find the best opportunities. Furthermore, international investing has its own set of nuances, and VYMI can assist with taking out that guesswork.
For more news, information, and strategy, visit the Fixed Income Channel.