High Yield ETFs

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There are many types of bond ETFs for investors, but for those who have higher risk thresholds, a junk bond ETF may the fund of choice…if you can stomach them. But before we discuss junk bond ETFs, it might be better to start by explaining an actual junk bond.

Okay, What is a Junk Bond?

A junk bond is the same as a corporate bond (or any bond for that matter). A company issues debt in the form of a bond to raise capital. However, in this case, the corporation that issues the bond doesn’t have a strong credit rating and therefore has a higher risk of defaulting on the debt. Normally junk bonds have credit ratings from the low B’s down to the C’s.

However, as most investors realize, higher risk means higher yields and in the case of junk bonds, the rates are usually 3-6% higher than on safer corporate bonds and US Treasury bonds.

So, What is a Junk Bond ETF?

A junk bond ETF is a bond ETF that tracks only high yield bond indexes. The assets in the index and the ETF are junk bonds. So instead of buying a few different junk bonds or investing in the index. you can make your trading life a little easier by purchasing a junk bond ETF.

Why Should I Buy a Junk Bond ETF?

If you are going to invest in junk bonds, then an ETF might be the way to go. ETFs have many advantages over other investments like mutual funds. with one of the big breaks being the tax advantages .

As for junk bond ETFs themselves, the real appeal is the higher yields. If you tend towards higher risk/return assets, then a junk bond ETF would be a better fit that a regular corporate bond ETF .

Some investors also prefer to create revenue streams in their portfolios and junk bond ETFs are a way to accomplish that goal.

Why Shouldn’t I Buy a Junk Bond ETF?

ETFs are good investments, but not without their disadvantages. No investment is perfect and junk bond ETFs are no exceptions.

As we discussed, junk bonds have higher yields because they have higher risk. And therefore, your junk bonds could default leaving you holding the bag. Also, not all junk bond funds are liquid. Trading in and out of positions may not be as easy as with other ETFs .

And like the controversy surrounding oil. energy. and other commodity ETFs. junk bond funds have been known for their tracking errors. There have been many instances of junk bond ETFs not correlating well with their underlying indexes.

So You Are Saying…

I am saying that with nay investment, research is a must. But if you have a higher risk tolerance, or if you want to invest in junk bonds, then you should definitely consider junk bond ETFs. And to help you with your decision, here is a full list of junk bond ETFs .

Or if you want to see all the bond funds available, I have a list of bond ETFs for you as well.