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ETFs vs. Mutual Funds: High-Yield Debt

The higher fees explain why these two mutual funds pay out lower yields than their ETF competitors. SPHIX yields 7.0% while FHIIX yields 7.2%.

Although their high costs and lower yield may seem like shortcomings, when it comes to total returns, the mutual funds have maintained a commanding lead over the ETFs. During the most recent two-year period, JNK and HYG have recorded total returns of 12.8% and 11.1%, respectively. FHIIX and SPHIX, on the other hand, have gained 18.9% and 20.6%, respectively. Having active management has paid off.

Year to date, JNK and HYG are up 6.0% and 4.0%, respectively, while FHIIX and SPHIX are up 5.2% and 5.6%, respectively.

For investors looking to trade in and out of the market, ETFs will continue to be the best option. HYG and JNK are more attractive for short-term trades due to their transparent nature, their ability to trade throughout the day, and the lack of short-term trading fees. Volatility is also a plus for traders. At one point the ETFs were down 4% or more this year, compared to less than 2% for the mutual funds.

For long-term investors, mutual funds are the better choice due to their total return outperformance.

Over the past year I have used HYG and FHIIX for my wealth management clients. In addition to income, the potential for price appreciation has made the sector attractive.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion owned the iShares iBoxx High Yield Corporate Bond and the Federated High-Income Bond Fund.

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Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
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