Seeking Alpha
Long only, value, long-term horizon, dividend investing
Profile| Send Message|
( followers)  

Typical asset allocation strategy and general investing basics has always preached incorporating a fixed-income position in your portfolio - though different strategies vary the amount of fixed income exposure. Due to a recent run-up in stocks and the Fed preparing to taper their own purchasing, investors are being scared out of the corporate debt market - and for no good reason. I contend that as an investor, you should keep a solid position in at least corporate debt - as I'm no fan of Treasuries and foreign debt can be complicating to figure out.

One reason for keeping corporate bonds in your portfolio is that now is the time that you can capitalize on the mass movement out of bonds and into stocks - specifically by lower principal price and that you'll be able to collect dividends while you wait for another rotation out of stocks and back into bonds - bringing you principal appreciation as well.

Speaking of a rotation, this brings me to my next point about why you should hold corporate bonds - Newton's Third Law of Motion. Newton's Third Law states that what must go up must come down. Undoubtedly you've read articles on this site or others or you've heard analysts on television programs talking about some form of a doomsday prophecy for the stock market and a major imminent pullback. Ultimately I'm sure that there will be another rotation back into corporate bonds in the future - maybe not today, next week, or next month but I believe it will happen.

The fact is that major corporations that issues corporate debt are in a good enough financial shape that they can manage their debt load- as reflected in their equity share prices. Granted, different companies will vary on their debt load for any of the plethora of reasons. You'd have to do your due diligence and do your own research on the individual company and their debt to equity ratio and their balance sheets- if you wanted to purchase individual bonds. If you're looking at a bond ETF, then you have some different metrics to look at - sector diversification, returns, and expense ratios, just to name a few.

In any case, I'd like to discuss two corporate bond ETFs that have caught my attention: the SPDR Barclays Short Term High Yield Bond ETF (NYSEARCA:SJNK), and the Peritus High Yield ETF (NYSEARCA:HYLD).

SPDR Barclays Short Term High Yield Bond ETF

The SJNK invests in corporate bonds in industrial, financial, and utilities. The sector allocation is 75.62%, 17.19%, and 6.62%, respectively, with 0.56% in cash. The ETF provides an impressive 6.27% dividend yield that is paid monthly and a gross expense ratio of 0.40%.

Fund Credit Ratings

BBB or Higher

0.56%

BB

42.03%

B

40.60%

CCC or Lower

15.41%

Not Rated

1.40%

Fund Maturity Ladder

0.00-1.00 Years

5.00%

1.01-2.00 Years

7.86%

2.01-3.00 Years

17.02%

3.01-5.00 Years

69.84%

5.01-7.00 Years

0.28%

Fund Performance

1 Month

-1.83%

QTD

-0.97%

YTD

1.45%

1 Year

7.40%

Inception (03-14-2012)

6.01%

Current the SJNK is trading almost exactly in the middle of its 52-week high and 52-week low of 29.36 and 31.18. U.S. News & World Report has rated the SJNK #20 in the Best Fit Corporate Debt Fund ETFs - ranking costs as "good", tracking error as "good", bid/ask ratio as "good", and holdings diversity as "excellent".

Peritus High Yield ETF

The HYLD is also a corporate bond fund that has a much broader diversification than the SJNK. The industry breakdown is as follows:

Oil & Gas Services (3%)

Food (6%)

Chemicals (2%)

Oil & Gas (7%)

Retail (4%)

Commercial Services (5%)

Misc. Manufacturer (3%)

Telecommunications (15%)

Computers (4%)

Metal Fabricate/Hardware (2%)

Transportation (5%)

Diversified Financial Svcs (4%)

Packaging & Containers (2%)

Advertising (3%)

Leisure Time (2%)

Aerospace/Defense (1%)

Healthcare - Services (8%)

Agriculture (2%)

Healthcare - Products (5%)

Auto Manufacturers (2%)

Forest Production & Paper (2%)

Beverages (2%)

HYLD provides an higher dividend than SJNK at 8.19% dividend yield that is paid monthly however the gross expense ratio is higher at 1.35%. So the trade-off is between the dividend yield and the gross expense ratio. HYLD also has an average duration of 3.58 years. (Source: AdvisorShares)

Fund Credit Ratings

BB+

0.00%

BB

0.51%

BB-

7.15%

CCC+

9.89%

CCC

3.90%

CC

0.00%

Not Rated

3.27%

Fund Performance

1 Month

1.32%

3 Month

4.23%

YTD

4.23%

1 Year

12.08%

Currently HYLD is also trading around the middle of its 52-week range between 48.65-52.67.

Conclusion

I stand firm in my belief that you should not be scared out of the corporate bond market because of the continuing rotation from bonds into equities. I feel this way for two reasons: first, by getting in now, you can capitalize on future capital appreciation while collecting a dividend to wait. And second, the equities market will go up and come down, causing a rotation out and back into corporate bonds.

I have given you two examples - the SJNK and HYLD - of corporate bond ETFs that I believe will provide you with a good yield and a some diversification in your portfolio. I like either of the two for a good fixed income allocation in your investment portfolio.

Source: Reasons To Not Ditch Your Corporate Bonds