Editor's note: This article originally appeared on RealMoney.comHigh-yield bonds are offering attractive yields when compared with other interest-bearing bonds. Many high-yield funds are offering yields of more than 10% and are vastly outperforming comparable T-bonds, which yield about 3%. To review, a high-yield bond by definition is any corporate bond that has a rating of BB or lower. BBB and A or higher are investment-grade ratings. High-yield bonds are also known as junk bonds because of their higher default rates. As noted in an article on preferred stocks, there is a hierarchy in case of a bankruptcy: bank debt, senior debt, junior debt, accounts payable, preferred stock and then common stock. In bankruptcy court, usually the senior debt holders and junior debt holders fight over the value of assets.
The fund has some familiar names: Ford ( F - Get Report), Freeport-McMoRan ( FCX - Get Report) and Coventry Health ( CVH). Sure, these are risky, but less risky than the underlying stocks. What are risky are financial junk bonds. Investment banks are levered to their eyeballs, and who knows what their assets are? Freeport-McMoRan has $42 billion in assets and $13.5 billion in tangible equity. That's a ratio of 3.23. What is scary is Citigroup ( C - Get Report), which has $2 trillion in assets and $63 billion in tangible equity (according to Yahoo! Finance). That's a ratio of 32.5! With Freeport, at least you know that if it goes bankrupt, you have a claim on its copper and gold mines. With Citigroup, you get a claim on a portfolio of credit card receivables. Yuck! iShares has a high-yield ETF, the iShares iBoxx High-Yield Corporate ( HYG). Its expense ratio is a little higher at 0.5%, and it has a yield of 11.18% (according to Yahoo! Finance). Like the Vanguard fund, this ETF holds many non-financial junk bonds, including Dollar General ( DG), Constellation Brands ( STZ) and Peabody Energy ( BTU). Is now the time to buy these funds, or is it too early? Tough call. There is basically a 7% spread between the yield on these funds and the comparable Treasuries. But if the Treasuries rise in yield, that gap will close. Also, if many of these bonds drop in value, it will kill the funds' net asset value. There is definitely risk. However, one can say that the bonds will be a lot less volatile than the common stocks of the likes of General Electric ( GE - Get Report) and Bank of America ( BAC - Get Report). Whether you think it's too early or that now is the time, these funds offer a great way to make a profit in these crazy markets.