HYG) and SPDR Barclays Capital High Yield Bond ( JNK), according to Morningstar. Can the active fund deliver compelling long-term returns? Perhaps. The year-old fund has an intriguing contrarian strategy that has prospered in the strong market of the past year. But the approach does take risks that could prove costly the next time investors flee low-quality bonds.
The lower quality bonds could sag in a downturn. But Gramatovich argues that his holdings could survive recessions and continue making interest payments. He says that the ratings agencies often give small bonds lower grades than they deserve. A favorite holding is an issue from EnergySolutions ( ES), which disposes of radioactive wastes for government and commercial customers. The bonds yield more than 10% and trade in the mid $90s. The bonds sank recently after the company reported disappointing earnings. But Gramatovich argues that the company will rebound because it provides a vital service. Since the beginning of 2011, assets in high-yield ETFs have grown from $13 billion to more than $28 billion. All that cash has helped to push up bond prices. Now many analysts worry that high-yield bonds have become too expensive. Follow @StanLuxenberg