NEW YORK ( ETF Digest) -- Junk bond ETFs have seen record inflows of investor money over the past year, growing as much as 68%, but investors may not be aware of the substantial risks that junk bond investments pose.There are a number of reasons for this massive influx of cash, not least of which is the reluctance many investors feel about putting money back into the stock market after getting burned in the recent financial crisis. With U.S. Treasury bond yields at historic lows, held down by continuing low interest rates from the Fed, many investors, particularly aging baby boomers, are turning to junk bonds and junk bond ETFs for extra returns.
Naturally there are those junk bond proponents who claim that many bonds with junk status have been rated that way unfairly. After all, many investment grade bonds were downgraded to junk bond status during the financial crisis. A potentially bullish sentiment, certainly, but one to keep in mind.
It appears that in certain market climates, junk bond ETFs such as HYG (blue) can provide performance superior to that of the S&P 500 (red). Although it is currently underperforming, HYG did very well from August-November 2011.