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Junk Bond ETFs Will Eat Your Family

NEW YORK (TheStreet) -- High-yield bonds, otherwise known as junk bonds, have long been an excellent source of capital appreciation and income for families and individuals.

They've benefited from the Federal Reserve's ultra-low interest rates. This, in turn, has prompted billions of dollars to surge into below-investment-grade holdings.

I don't blame anyone for wanting to seek a higher return on their assets than the 2.07% yield offered by fund s such as the iShares Core Total U.S. Bond Market ETF (AGG). This type of low-yielding investment becomes even harder to swallow when you consider that rising interest rates can quickly wipe out marginal income.

While I have been a big proponent of these moves in the past, I am hesitant to recommend that investors put new money into high yield fixed-income or bank loans at this time. The height of prices, compression of yields, and general complacency in the low credit quality arena has made me cautious about the risk to reward equation from this point forward.

The biggest ETF in the high yield fixed-income space is the iShares High Yield Corporate Bond ETF (HYG), which has more than $13 billion under management. If you look at the five-year annualized returns of this fund through Dec. 31, you would be amazed to see equity-like gains of 15.01% per year.

In fact, HYG has continued to march even higher in 2014, which has pushed the 30-day SEC yield down to a relatively meager 4.49%. When you consider that the 12-month trailing yield is noted at 5.96%, you can see just how much less income new money would receive today than it would a year ago.


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