Best-Rated Junk Bonds Soar 50% in a Year

NEW YORK (TheStreet) -- With the Federal Reserve keeping rates near zero for the foreseeable future, investors are taking on more risk to find higher yields.

Those with the highest risk tolerance are going all the way out. If you're looking for a high-yield fixed-income fund holding so-called junk bonds, there are only a dozen "buy"-rated funds.

All three corporate high-yield exchange traded funds, or ETFs, scored "good" grades. iShares iBoxx $ High Yield Corp ETF ( HYG) carries the best rating, B-plus, and sports a big dividend yield of 9.1%. The ETF returned 44% for the year ending Feb 28.

The SPDR Lehman High Yield Bond ETF ( JNK), rated B, performed even better, soaring 57% on a dividend yield of 10.7%. PowerShares High Yield Corp Bond ETF ( PHB) lags behind, with a rating of B-minus, a yield of 7.9% and a 12-month return of 35%.

Of the nine corporate high-yield mutual funds rated B-minus or better, the Metropolitan West High Yield Bond M Fund ( MWHYX) presents the best risk-adjusted-return profile, with a rating of B. The fund's dividend yield of 9% is massive, considering investors are now losing money on money-market and CD securities when inflation is factored in. Metropolitan's one-year 50% gain is extraordinary.

The B-minus rated Principal High Yield Fund I Inst ( PYHIX) performed nearly as well, up 48%, on a slightly higher dividend yield of 9.4%.

Not if, but when, interest rates start to rise, those corporate high-yield funds could reverse course. Corporate bankruptcies and inflation are also a risk. When speculating on high-yield securities, you can lose money. In the meantime, it's hard to deny the beauty of a 10% yield.

For the best rated exchange-traded funds, check out our Top ETFs page.

-- Reported by Kevin Baker in Jupiter, Fla.

Kevin Baker became the senior financial analyst for TheStreet Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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