Picking The Right Junk Bond ETF

In the words of "Junk Bond King" Michael Milken:

"Junk bonds? Perhaps there's a better name for the bonds that fuel 95 percent of American business."

Investors like yield and junk bonds offer them. Described as bonds generally carrying a rating below BBB, they are considered not "investment grade" due to the risky financials of their issuers and thus non-negligible possibility of bond default. In past decades, they were largely inaccessible to the ordinary investor, but now with the advent of ETFs are available just a click away with ETFdb currently listing 43 US-traded junk bond ETFs.

The span of junk bond ETFs available vary significantly in their structure as well as the nature of the underlying bonds themselves. For example, the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGLconsists of bondswhich, when originally issued, were investment-grade, but then as their backing companies' credit worthiness deteriorated, the price of the bonds, and thus yield on them, fell to junk-level status. Other junk bond ETFs differ in ways more similar to their non-junk bond counterparts, such as by average maturity date.

Junk bonds are risky - in the midst of the 2008 financial crisis as company defaults become not only a serious risk but material reality for many companies, the junk bond market rate soared up to over 23% (as compared to the current market rate of about 5.9%). With yield comes costs.

The market for "safe" junk bond ETFs is rather small. I believe that an ETF for a longer-term investment strategy, as compared to trading, and in such a narrow sector should have several characteristics that ensure its stability and liquidity. As a bar, we can say that this means at least $1 billion in ETF assets, reducing event horizon dangers as ETF funds dwindle, and liquidity of at least 500,000 shares a day.

By this measure, there are only five junk bond ETFs fitting that "safe" criteria where one can worry less about the structure of the ETF affecting one's investment strategy and rather focus on the characteristics of the fund composition itself.

These are, at the moment, the following:

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Disclaimer: These are only my opinions and do not constitute investment advice.

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