The Long And Short Of It: 2 High-Yield Bond ETFs

Bonds may be the safe play, since clearly everyone has been piling into them, right? Remember that the best performing ETFs last year were long-dated U.S. treasuries like ZROZ and TLT.

Why buy junk bonds? The Fed has made much to do about keeping rates low until 2014. You would think that with all of the talk from the global macro players that one should jump head first into long-dated bonds. What the pros aren't telling you is that most expect a small but meaningful rise in long-term rates. Understand that if the 10-year treasury goes from 2% to 3%, nobody will care from the top down. Meaning, the housing markets will not collapse, the U.S. or ECB will not implode. However, investors holding long-dated bonds will take a haircut on their brokerage statement. For instance, every 1% increase in the 10-year treasury will decrease the value of TLT about 12%-14%. All of this for an annual coupon of around 3.3% doesn't sound too safe, does it?

Investors are facing a conundrum. Do they go out on the long end and face significant principle loss or take more credit risk? We think the risk of high-yield bonds is less than the disaster we know as 2008. Corporate balance sheets are cash rich and profits are higher than ever. Okay, Kodak bit the dust, and American Airlines hit the bricks. Really? We all saw that coming. The most rational approach to junk is to buy a basket of lower credit quality bonds and diversify your risk.

Now let's take it to another level. Why can't we have short duration and high yield? Cake and eat it too? On some level yes, but the trade-offs are real. We start by analyzing the characteristics and performances of two high-yield bond ETFs - JNK, the SPDR Barclays Capital High Yield Bond ETF, and BSJF, the Guggenheim BulletShares 2015 High Yield Bond ETF. JNK is the standard ETF that traders will flock to when looking for quick and easy exposure to a high yield index. This is the same idea when you buy SPY to get broad equity exposure. To be fair, BSJF is a newly designed product that has less volume and very much a niche product for those who do their homework or get sold stuff they don't understand. No judgments there, I need people to buy and sell stuff so I have liquidity. What do I care if they don't know what they are doing? Okay, I am being half sarcastic, but only half.

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