Does ‘Bad Bank’ Increase Appetite for Risk?

The new plan unveiled from the Treasury Secretary Geithner shows there is interest in taking risk. This is a shift in attitude from the investor. If this holds look for higher risk debt instruments to rally. One ETF I have been tracking for awhile is (NYSE: HYG), iShares iBoxx High Yield Bond ETF.

Logging into the iShares website for a current update on the fund provided the following details:

The fund tracks the iBoxx $ Liquid High Yield Index.
Number of bonds in the portfolio is 53
Management fee is 0.5%
Weighted Average Maturity is 6.5 years
Weighted Average Coupon is 8.89%
Effective Duration is 4.5

Distribution yield based on $66.16 share price is 14.27%
30-day SEC yield 16.52%
Average Yield to Maturity is 16.5%

47% of the fund in B+ rated or higher by Moody's
4.9% of the fund in non-rated bonds by Moody's

The attractiveness in the fund is the yield, but that does not come without risk. Taking a look at the chart below you can see the downside due to the increased risk in the credit markets. Therefore, an investor must manage the risk of owning such an investment. If you were to buy the ETF today at $69 with a stop of $64 your worst case scenario would be a loss of $5 per share or 7.2% or approximately half of the potential dividend yield. I find that an attractive risk/reward relationship. Even if your stop were below the low of $61.50 or $7.50 a share you would be risking less than 11%.

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The downtrend line from the high at $80 in January is in play to be taken out on the recent move higher. Technically that is positive. As mentioned above the risk appetite from institutions as well as individual investors is moving in a positive direction. The share price could rise and more investors are willing to accept the risk of this type of investment.

Watch, research and evaluate if it fits into your portfolio relative to your risk parameters.