Junk bonds have definitely not been junky in 2012. According to the Barclays U.S. High Yield index, their return so far is an average of 6.12%.
But investors still need to be careful. Junk bonds are always risky. After all, they’re debts of companies that have have less-than-stellar (also known as “noninvestment-grade”) credit ratings. So, if there’s a problem with the business or an economic downturn hits, bondholders could be in for big losses. This is why it’s a good idea to invest in a junk-bond fund, where you can get diversification.
Here’s a look at four of the top junk-bond funds on the market now:
BlackRock High Yield Bond Investor A
When it comes to bond investing, BlackRock (NYSE:BLK) is one of the best in the world. The firm has a deep bench of portfolio managers and analysts who have spent decades analyzing corporate default risks and economic trends.
This has certainly helped the BlackRock High Yield Bond (MUTF:BHYAX) fund, which has $7.6 billion in assets. It’s one of the best-performing junk-bond funds over the past three years, with an average annual return of about 16%. And the good news is that the success has continued into 2012. So far, the return is 9.5%.
The BHYAX’s portfolio manager, Jimmy Keenan, has a disciplined approach to selecting bonds. For the most part, he wants companies that have relatively stable revenues and cash flows.
Eaton Vance Income Fund of Boston A
The Eaton Vance Income Fund of Boston A (MUTF:EVIBX) has the advantage of veteran portfolio manager Mike Weilheimer, who has been investing in the bond market since the late 1980s.
With his broad perspective, Weilheimer has been able to anticipate the changes in the junk bond market. To benefit, he has made the right moves by adjusting the portfolio in terms of the credit risks.
No doubt, Weilheimer has an impressive long-term track record. Over the past decade, the average annual return was 9.4%
Fidelity Advisor High Income Advantage
The Fidelity Advisor High Income Advantage (MUTF:FAHDX) fund has a wide mandate. Besides investing in junk bonds, the fund will also purchase equities in troubled companies. This can certainly help juice up returns. Consider that the fund is up a sizzling 10.78% for 2012.
But the portfolio manager, Harley Lank, is still focused on in-depth research and finding ways to manage the risks. For example, he’s avoiding problem areas like Europe.
SPDR Barclays Capital High Yield Bond
If you want an exchange-traded fund, the SPDR Barclays Capital High Yield Bond (NYSE:JNK) fund is a good choice. It has $10.8 billion in assets and trades an average of 5.7 million shares a day.
JNK tracks the Barclays Capital High Yield Very Liquid Index, which consists of 225 bonds. The expense ratio is also a reasonable 0.40%.
For the past three years, the fund has posted standout returns, with an average of about 13%.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.