High-Yield Bond Funds for the Daring

NEW YORK (TheStreet) - Throughout the New Year, the markets are sure to see a variety of new trends develop and shape the investing landscape. However, it is also important to keep in mind the strategies which worked in 2010.

For instance, high-risk debt, a wildly population investment in the past year, will likely continue to be sought after in 2011.

High-yield and distressed debt has become an attractive region of the market for investors who are still warming up the economy. As the markets recover, risk tolerant investors who have stuck to the sidelines with cash or U.S. Treasuries may find high-yield debt an attractive medium between these ultra-conservative options and riskier asset classes such as stocks and commodities.

Two of the most promising ways to access this riskier slice of the bond market are the iShares iBoxx $ High Yield Corporate Bond Index Fund(HYG) and the Third Avenue Focused Credit Fund(TFCIX).

HYG's index is composed of a diverse collection of corporate bonds rated below investment grade. This fund properly protects investors from the gut-wrenching volatility inherent of this asset class thanks to its broad diversification. HYG's index is comprised of over 400 positions. All told, the fund's top 10 holdings account for less than 9% of its total assets.

Companies whose debt makes up the fund's largest positions include CIT Group(CIT), Lyondell Chemical Company, HCA and Community Health Systems(CYH).

Launched in the second half of 2009, Third Avenue's distressed debt fund appeared just in time to benefit from investors using high-yield and distressed debt to take cautious steps back into the marketplace. In the short time it has been available the fund has already managed to gather $1 billion in assets.

Like HYG, this mutual fund option boasts exposure to the debt of companies which run the risk of defaulting. However, another large percentage of the debt underlying the Third Avenue product is already in default or issued by companies which are currently facing, or already in bankruptcy. Given the high caliber of risk associated with this debt, TFCIX is a more risky endeavor that HYG. Therefore, even risk tolerant investors should set aside only a small percentage of their portfolios for this product. TFCIX's minimum investment is $2,500.