This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Where There's Yield, There's Risk

If the economy is heading into a black hole, why are investors bidding up the prices of some high-yield corporate bond exchange-traded funds?

Prices paid for some ETFs are exceeding the value of the underlying securities, known as the net asset value. Such premiums were once the preserve of closed end funds. These days, anything is possible. Case in point: the massive premium being paid for the iShares iBoxx $ High Yield Corporate Bond Fund (HYG), an ETF.

HYG's NAV is about $66, but this hasn't stopped some investors from driving the price to $75. The yield is in the 11% to 12% range. But where there's yield, there's risk, especially during a recession.

HYG invests in U.S. corporate bonds. Aside from a government bailout plan that may protect some corporate issues from default, the only other risk-mitigating factor I can see in this ETF is that it has 11% of its assets allocated to the electrical sector, 12% to health-care services and about 6% to oil and gas. Those industries might be more stable in a downturn and subject to a lower default rate. However, they account for only 27% of the portfolio, so risk looms large.

The 52-week trading range for HYG has swung from a low of $62.50 recently to $102 about a year ago. As the economic crisis unfolded in August and September, the fund's price began to fall markedly, reflecting the severity of the situation.

However, something else started to happen. The uptick in the price of the ETF's shares to $75 suggests a trading strategy is in play based on renewed confidence in high-yield securities and, perhaps, the economy in general. But there is no good economic news to suggest the country is on the mend. Perhaps some investors are pushing up the prices of high-yield ETF shares to lure others into some sort of short-term trading strategy.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,098.45 +18.88 0.11%
S&P 500 2,003.37 +6.63 0.33%
NASDAQ 4,580.2710 +22.5760 0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs