High-Yield Bond ETF: Take On Risk for Better Returns
I've written in the past about bond ETFs and how they represent a portion, albeit small, of my portfolio. Up to this point I've only dipped my toes in to exchange traded funds that track the Lehman Aggregate Bond Index (AGG) and the iBoxx Corporate Bond Index (LQD).
Recently, Barclays launched a high-yield bond ETF that tracks the iBoxx Liquid High Yield Index (HYG). Of course, a higher yield means more risk, but this new offering does help round out the collection of ETFs from Barclays by focusing on lower-rate bonds that both AGG and LQD won't touch.
High-yield bonds currently pay out about 2.5% more than treasuries. Although the yield promises to remain relatively high, there will also be significant volatility. Another statistic of interest is that over the past 5 years, according to J.D. Steinhilber, “high yield bonds have delivered 10% annualized returns over this period with volatility of only about 60% of the S&P 500.” Going forward, the general rule of thumb is that bonds will appreciate sharply during good economic times when there is little chance of default. However, when markets decline, credit spreads can widen and high yield can bear the brunt of the downturn.
It's been a while since I've bought in to a new ETF, but I think this one will change that. My biggest concern is that the management fee is quite high at 0.5% especially compared to bond ETFs from Vanguard that have fees that are 50% lower. Still, I like to cover various areas of the market and now I have a tool that gives me exposure to the missing piece in the domestic bond market. The one area missing still is an ETF or collection of ETFs that provide exposure to the international bond market.