This Day On The Street
Continue to site right-arrow
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!

Getting Fat Yields by Casting a Wide Net

Stocks in this article: HYG JNK PCEF IYLD ACG TLT

NEW YORK ( TheStreet) -- High-yield bond ETFs have enjoyed surging popularity. During the past year, investors poured $5.6 billion into the two biggest high-yield ETFs, iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK), according to Rich yields and strong returns have attracted the crowds. The two ETFs yield around 6.6%, and both returned more than 12% in the past year, according to Morningstar.

Can high-yield funds continue rolling? Maybe. But the risks are growing as the share prices rise. High-yield bonds are rated below-investment grade, so they pose default risks. A crisis in Washington could send the low-quality bonds into a tailspin. To limit risk, consider a broadly diversified income ETF. Besides owning high-yield bonds, the diversified choices also hold high-quality assets. If junk bonds sink, the high-quality issues should help to stabilize the portfolios.

An intriguing choice is PowerShares CEF Income Composite (PCEF), which yields 7.4% and returned 15.9% in the past year. A new diversified ETF is iShares Morningstar Multi-Asset Income Index (IYLD), which yields 7.0%.

The PowerShares fund currently has 19% of assets in high-yield bonds, 42% in higher-quality issues, and 37% in stock strategies that use options to generate income. The different holdings are selected to complement each other. If the economy expands and interest rates rise, high-quality bonds can sink as investors dump existing bonds with low yields. But prices of junk bonds could be resilient at a time of rising rates because investors would worry less about defaults as the economy grows. The stock strategies can also thrive when rates rise.

To implement its diversified approach, the PowerShares fund follows an unusual strategy, investing in a broad portfolio of closed-end funds. Because of their structure, closed-end funds can yield more than traditional mutual funds. Like mutual funds, closed-ends invest in portfolios of stocks and bonds. But shares of closed-end funds trade on stock exchanges. When investors are bullish, the shares can trade at premiums to the value of the assets. The funds can slip to discounts when the market is less ebullient.

The best time to buy is when closed-ends sell at discounts. The PowerShares portfolio currently has an average discount of about 3%. So investors can obtain a dollar of assets for 97 cents. When you buy at a discount, you get a higher yield and more income for each dollar invested.

1 of 2

Select the service that is right for you!

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 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • 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