Is there ever really a perfect middle ground on risk? Former "Junk Bond King," Michale Milken, always wanted you to think so.
(Of course, Mr. Milken wound up with a 10-year sentence for securities fraud. And the SEC permanently barred him from the securities industry.)
That aside, the "high yield," low-rated debt market is alive and well. And with yields as high as 10% from many of the major Junk Bond ETF players, some believe that the middle ground between high-grade corporate bonds and the more volatile stock market is worthy of pursuit.
Consider the following:
1. Junk bond investments like SPDR High Yield (NYSE: JNK [1]) have significantly beaten the S&P 500 SPDR Trust (NYSE: SPY [2]) in 2009 and... they have done so with less risk. Tack on a 12.4% annualized yield for JNK... and the buffer of a sizable monthly income stream has helped lift JNK to a 31% YTD gain versus SPY's 17.5%.
2. All of the high-yield debt investments are effectively sporting anual income streams near 10%. SPDR High Yield (NYSE: JNK [3]) is offering 12.4%, iShares IBox High Yield (NYSE: HYG [4]) is serving up 9.9% and PowerShares High Yield (NYSE: PHB [5]) is proffering 9.4%. High-grade corporate bond funds like iShares Investment Grade (NYSE: LQD [6]) are 4%-6% points lower at 5.3%.
3. In the bear-to-cyclical-bull period, 10/9/2007 - Present, high-grade investment bonds provided a total return of nearly 8%. iShares IBox High Yield (NYSE: HYG [7]) is essentially flat at 0% and the S&P 500 SPDR Trust (SPY) is down -30%. If your outlook is entirely negative, then you may want to stick with investment grade bonds only. However, if you want an income stream with potential for capital appreciation like stocks... junk may help you clean up.
I find this is often a tough area to get clients excited about. And if you are still scared that riskier corporations, those that may default on debt obligations, are not the place to be... I have a potential alternative for you. The SPDR Capital Convertible Bond Fund (NYSE: CWB [8]) is another way to take a stance between the highest grade investment bonds and the turbulent world of equities.
CWB only offers a 4% SEC yield, but this is on very short maturing bonds that are just a "skohsh" below an AA rating. At Baa, SPDR Capital Convertible Bond Fund (NYSE: CWB [9]) is far better than the BB- world of "junk," and offers 70% or more of the upside of underlying stocks in its index.
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If you'd like to learn more about ETF investing... then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod [11].
Disclosure Statement: ETF Expert [12] is a web log ("blog") that makes the world of ETFs easier to understand. The content does not represent investment advice, nor are the securities discussed suitable for every investor. Pacific Park Financial, Inc. [13], a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. [14] web site.