Bond ETF investors should consider the potential benefits of high-yield debt and look to ways to incorporate these investments into their portfolios.
On the recent webcast (available On Demand for CE Credit), Potential Yield Maximization Strategies, Mark Carlson, Senior Investment Strategist at FlexShares Exchange Traded Funds, explained how high-yield debt has moved from a niche fixed-income option to a core portfolio holding.
The modern high yield sector began to gain prominence in early 1980s and the Bloomberg Barclays US Corporate High Yield Bond Index use to track a market value of just $43.9 billion back in 1990. The high yield market has survived the 80s, the Dot.com bubble, a credit bubble, the Great Recession and quantitative easing.
Now, with greater interest in diversifying holdings, the benchmark high-yield index now tracks a market worth $1.3 trillion as of the end of 2017. Over the past 20 years, the Bloomberg Barclays US Corporate High Yield Bond Index has generated a 6.55% annualized total return.
As the speculative-grade debt category matured over the years, Carlson pointed out that the greater acceptance of high yield for a source of capital has changed the investment characteristic of the junk bond market. For instance, the high-yield category now exhibits greater diversity, higher average ratings, lower credit premiums and a changed perception of perceived relative safety versus lower quality “junk” of old.
High-yield debt provides diversification by helping investors diversify fixed-income or rate risk and equity exposure. While high-yield is consider a riskier asset with higher correlation to equities than investment-grade debt, the debt category provides potential opportunities for positive risk-adjusted returns.