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TheStreet

-- Recent economic conditions have provided ample fuel for distressed-debt and high-yield corporate bonds.

A recovering economy has encouraged investors to regain their appetite for risk, and improved cash flow has prompted firms to pay interest on their debt.

There are a number of ways for investors to gain access to distressed-debt and high-yield corporate bonds. Year to date, the

SPDR Barclays Capital High Yield Bond ETF

(JNK) - Get SPDR Bloomberg High Yield Bond ETF Report

has climbed nearly 33%, while the introduction of the

Third Avenue Focused Credit

(TFCVX)

has given investors a more actively managed strategy.

I believe that both of these funds still have tremendous upside potential through the end of 2009. Investors are looking for yield, and as the year draws to a close, investors tend to look back and add funds to their portfolio that have been performing well.

SPDR Barclays Capital High Yield Bond ETF

JNK tracks the Barclays Capital High Yield Very Liquid Index. The fund currently has 109 holdings with an average credit quality of B2 and the average duration is 4.6 years. Top holdings include bonds from

GMAC

(GJM)

TheStreet Recommends

and

AIG

(AIG) - Get American International Group, Inc. Report

.

JNK's 0.40% management fee makes this ETF more expensive than aggregate bond index ETFs like

Barclays Aggregate Bond Fund

(AGG) - Get iShares Core U.S. Aggregate Bond ETF Report

, but investors are paying for a narrow focus.

Since the underlying debt is risky and volatile, owners of JNK should be aware of any differences between the fund's market price and its underlying value. Even though more than a million shares of this fund trade hands in an average day, there can still be discrepancies between this fund's pricing and its underlying debt.

Third Avenue Focused Credit

Third Avenue Focused Credit has the following stated objective: "Seeks total return from a combination of capital appreciation and interest income, by focusing capital in our highest-conviction ideas across the credit spectrum."

This new

fund

from Third Avenue will focus on areas like performing bonds and loans, debt under stress, capital infusions, distressed assets and restructurings. The portfolio is designed to be concentrated on 50 to 60 holdings.

The biggest differences between JNK and TFCVX are fees and management. While JNK is a passive ETF investment, TFCVX is managed by Jeffrey Gary, who headed

BlackRock

's

(BLK) - Get BlackRock, Inc. Report

high-yield and distressed investment team before joining Third Avenue. Returns will be driven, for better or worse, by Gary's ability to select individual situations for investment.

For this expertise, investors will pay fees of 1.71% for retail shares and 1.27% for institutional shares, although the first year will be reduced to 1.4% and 0.95%.

While I think that both JNK and TFCVX are good plays for the final stretch of 2009, they are only appropriate for a small portion of a risk-tolerant portfolio. As investors enter into 2010, I believe that they will eventually be attracted back towards quality companies and away from junk bonds and distressed debt.

In the meantime, however, high-yield debt still offers potential for return. The market for high-yield debt has recovered significantly since March, but credit spreads between this debt and Treasuries are still at the high end of the range because the rally was from such low levels.

Buying either JNK or TFCVX to capture short-term returns is a safer bet than trying to pick individual corporate debt issues. With high yield comes high risk, and these funds help to mitigate the danger of any single issuer defaulting. Still, I expect these funds to be extremely volatile even as they offer significant upside potential.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management owned Third Avenue Focused Credit.

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.