NEW YORK (TheStreet) -- Billionaire investor Carl Icahn's warning about the risks of junk-rated debt might scare you, but that doesn't mean you should write off the entire category.
He sounded the alarm about high-yield -- or non-investment grade -- securities last week, saying the market is "extremely overheated." It's not the first time that observation has been made.
Still, there is a case for you to keep at least a portion of your portfolio in this type of debt even though it's riskier. Specifically, you might want to consider the SPDR Barclays High Yield Bond (JNK) or the iShares iBoxx $ High Yield Corporate Bond (HYG) exchange-traded funds. Here's why:
1. -- If You Like Stocks, You Should Love Junk. I hear plenty of people who should know better say that junk-rated debt is just too risky. But these same people go out and invest in stocks, which are risky but have high returns over time.
That attitude just doesn't make sense. If you like stocks, you should love high-yield securities. They're like stocks in drag.
The returns for these lower-rated securities are highly correlated with those of the stock market. As the stock market rallies, you can expect the high-yield returns to rise too. The returns are also less volatile than those of stocks. I've talked to lots of strategists about this, and I've seen a variety of analyses. A general rule is that junk debt should give you two-thirds of the returns of the stock market, but with half the volatility. That's over the long term.