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Going Risk-Off: The 3 Best Funds for Junk Bonds

These funds offer the high yields and diversification need in a volatile market

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Junk bonds, and the mutual funds investing in them, had a difficult 2015. But that doesn’t mean investors should ignore this high-yield area of the market now.

Instead, the market for junk bonds in 2016 requires one particular virtue — selectiveness.

Stay far away from the funds that have excessive allocations to the distressed and illiquid. Simply put, pick your junk with the tenacity of a dumpster diver.

Exemplary of junk bonds to avoid: Third Avenue Focused Credit (TFCIX), which closed to investors on Dec. 10 and was placed into liquidation by its board of trustees.

TFCIX had focused allocations of 5% or more on distressed names like Clear Channel Communications (CCO). By its closure, TFCIX had lost 30% in 2015, whereas the average high-yield bond fund shed just about 4%.

So with the lessons learned over the past year, the best junk bond funds to buy now are broadly diversified among the higher quality junk bonds.

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