With markets undergoing a correction in the past few weeks, now is a good time to evaluate sectors that will outperform if we see a recovery from the near-hysteria about the sovereign debt problems in Europe. To that end, one of the best bellwethers for investor sentiment is the junk bond market. In light of the high level of risk inherent in junk bonds, improving conditions often are accompanied by a strengthening in that sector.
The iShares iBoxx $ High Yield Corporate Bond Fund is an exchange-traded fund (ETF) that lets you invest in the looming recovery of junk bonds. The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the iBoxx $ Liquid High Yield Index, a corporate bond market index compiled by the International Index Company Limited.
HYG consists of liquid, dollar-denominated high yield corporate bonds for sale in the United States. As of Oct. 11, HYG had amassed total net assets of $8.5 billion in high yield bonds that ranged in quality from BBB+/Baa1 to CC/Ca. The fund also has produced a 30-day Securities and Exchange Commission (SEC) yield of 8.54%. In addition, HYG is very well diversified, with more than 470 different bond holdings. For example, CIT Group is HYG’s largest component, yet it only makes up 1.17% of the fund’s net assets.
The stock market’s continued volatility has led many long-term investors to look for ways to protect their capital, while still producing a good return that is fueled by an enticing yield. Since HYG is yielding close to 9%, there are few segments of the market that can match it.
With the treasury market generating yields of nearly zero and the equity market still volatile, the corporate bond market is a sector that provides attractive returns from dividend payments and offers the potential for capital appreciation. While high-grade corporate bonds are a safer investment than the high-yield junk bonds, there is considerably more upside for ETFs such as HYG as the market recovers. While it may be a bit early to invest in HYG, it is an ETF to watch closely for signs that the market is stabilizing and starting to advance in earnest.
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