New High-Yield Bond ETFs Reach for Yield

In 2008, which was clearly a bad year for most assets, HYG was down 23%, which is a large decline in the context of bond market safety. In 2009 it came partially back going up 16% but is still 15% below its all-time high in 2007.

The segments captured in ANGL and EMHY, along with other new and narrower high-yield funds issued by other companies, stand to be more volatile than HYG.

One reason to own any fixed-income security is to offset the volatility of the stock market or perhaps to even see the security's value rise when the stock market declines.

This happened during 2008, when stocks slumped but the iShares Barclays 7-10 Year Treasury ETF (IEF) was up 10%, providing some offset to the stock market's decline.

High-yield bonds are also known as junk bonds, which often aren't considered high quality.

Based on how markets and human behavior tend to work, the next time there is a large, fast decline in equities, it is likely that high yield bond funds will also go down a lot, thus offering no real diversification vs. the equity portion of a diversified portfolio.

This is the risk that investors take when they validate the idea in the media that they must load up on higher-risk assets to get a decent return.

The point here is not to avoid all higher-yield fixed-income market segments but to include only moderate amounts of these investments in one's portfolio.

At the time of publication, Nusbaum had no positions in securities mentioned.

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