Face it, Treasury bonds’ razor-thin yields are awfully underwhelming right now. That’s great for Uncle Sam, as InvestorPlace’s Richard Band notes here, but not so great for income investors. So if you’re looking for higher returns, junk-bond exchange-traded funds might be an intriguing alternative.
Junk bonds are corporate bonds issued by companies with lower credit ratings. Buying bonds rated BB or lower is riskier than buying investment-grade debt. But similar to consumer loans for those with less than stellar credit, these companies compensate the risk with far higher yields.
Junk-bond ETFs also offer greater diversification because they invest in many different companies, so you’re not betting everything on the fortunes of a single company. Since ETFs trade over an exchange like equities, they also are easier to buy or sell.
Although recession fears over the euro zone crisis sent investors running for cover in the third quarter, there are new signs that junk bond ETFs are back in fashion — they went wild last month, reversing their big slide in August.
Here are three high-yield bond ETFs bold investors might want to consider to boost income:
- SPDR Barclays Capital High Yield Bond (NYSE:JNK ): The benchmark for this ETF is the Barclays Capital High Yield Very Liquid Index, and it usually invests about 80% of its total assets in bonds that are part of the index. At $38.57, JNK has gained 13% in the past month. The fund has a current dividend yield of 7.9%, and a one-year return of 3.6%.
- iShares iBoxx $ HY Corp Bond Fund (NYSE:HYG). This ETF tracks the iBoxx $ Liquid High Yield Index, investing at least 90% of assets in securities that comprise the index. At $88.51, HYG has gained more than 13% in the past month. HYG has a dividend yield of 7.7%, a one-year return of 4.5% and a one-month return of 6.8%.
- PowerShares High Yield Corporate Bond (NYSE:PHB). This ETF tracks the RAFI High-Yield Bond Index and invests at least 80% of its assets that comprise the index. All bonds are rated Ba1/BB+ or lower either by S&P or Moody’s, but not less than B3/B-. The fund has a dividend yield of 6.2%, a one-year return of 4.3%, and a one-month return of 5%.
Bottom Line: While the returns are exciting, and the market is more optimistic that we can steer clear of a double-dip recession, higher yields are the price tag for greater risk. And a growing number of ETFs in all sectors have been tinkering with the underlying index of their funds — a dynamic that’s bound to impact fund performance.
As of this writing, Susan J. Aluise did not hold a position in any of the investments named here.