Junk Bond ETF - A Look at a High Yield Bond ETF

If you are looking for a high yield investment, and are not afraid of some higher than average risk, junk bonds have historically provided above average yields. A high yield bond ETF will provide diversification without the expense of a typical bond fund. Here’s a look at the risks and rewards.

JNK - SPDR Barclays Capital High Yield Bond ETF

Author: Jim McEwan

I’ll be the first to admit that my portfolio doesn’t contain enough debt. There are a few reasons for this – first off, buying bonds (especially in Canada) is more difficult than buying stocks (you need to go through a broker – this means big time commissions) and usually requires a much larger investment. In addition, I’m still a LONG ways from retirement, so I don’t mind the volatility of the equity markets and don’t need a steady stream of monthly income. That being said, I’ve been looking at investing in corporate bonds for a few months now and JNK looks like a great place to start.

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So what exactly does JNK do? Well, it’s an exchange traded fund that “seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital High Yield Very Liquid Index”. That definition probably wasn’t much help to you, so I’ll try and simplify it: the ETF buys a basket of bonds which are not investment grade (average rating is B2) and pays out the coupon and face value payments to investors. Barclays charges a 0.40% management fee, which is quite reasonable for this type of product. JNK gives individual a chance to buy a group of these high yielding bonds through the stock market, which makes them easier and cheaper to buy and sell (even in small quantities).

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The fund is currently yielding slightly above 10% annually, which is quite an impressive return. The share price isn’t overly volatile – its current price of just below $35 is roughly $10 above its 52 week low and $10 below its 52 week high. My belief is that the American economy will strengthen over the next several quarters, but that it will fail to achieve significant growth in the coming years. If this scenario plays out, then the best idea is to move up the balance sheet and invest in debt rather than equity, since debt holders get paid first. Furthermore, I believe credit spreads will contract further over the summer months, boosting the return to JNK’s investors. There is a risk that the fund’s dividend will be reduced as more of these poorly rated companies fail to make their debt payments due to the recessionary environment, but I believe the American economy will improve in time to mitigate this risk factor.

A product like JNK is a great idea for a retirement fund (401k in the US or an RRSP in Canada). Purchase some units at these levels, collect the handsome 10% dividend each year and maybe a few percent points in price appreciation as well, and you should be more than satisfied come retirement time. This ETF is the best way I have found to play the American corporate debt market and it is something I am seriously considering purchasing, especially since there aren’t any comparable products in Canada.

The Stock Guy’s Official Ranking: 8 out of 10

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Article Source: ArticlesBase.com - JNK - SPDR Barclays Capital High Yield Bond ETF

Filed under ETFs - Exchange Traded Funds

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