While the major US stock indices decisively broke below their 50 day moving averages last month on higher volume, it may to premature to count this rally as over. And, any rise in equities would represent a very attractive entry point for investors looking to get into high yield bond funds. While I only track about 50 high yield bond funds in our High Yield Trader timing service, there are hundreds of high yield bond mutual funds and three high yield bond ETFs.
As an active investment manager, I typically trade high yield bond ETFs with a preference for the iShares iBoxx Corporate High Yield Bond fund (NYSEARCA:HYG) or the SPDR Barclays Capital High Yield Bond fund (NYSEARCA:JNK). These two are more diversified, have better liquidity and have lower fees than the comparable PowerShares ETF (NYSEARCA:PHB) as you can see from the table below (click to enlarge image).
High yield bond ETFs are attractive because the offer the opportunity for capital appreciation and dividend income.
But what really sets them apart are the high dividends (paid monthly) which exceed most other widely available investment products and their liquidity (this can be a real benefit versus many mutual funds which impose short term redemption fees).
All three high yield bond ETFs have yields above 8%, and with dividends still taxed at only 15% and money market mutual funds and CDs typically offering paltry yields from 0.5% to 2.0%, higher yielding instruments such as these are especially attractive.
A final reason to consider trading high yield bond ETFs is that they so closely track the behavior of equities that you can generally count on them to rise in value alongside equities and fall when equities decline. I recently ran a correlation of the monthly closing prices for HYG since inception (April 2007) versus the S&P 500 and, while I knew the relationship was strong, I was astonished at the 0.967 value that resulted.
This means that the tools that tend to be most effective when determining when to add to or subtract from your overall US equity exposure should also work for helping to determine when to buy and sell high yield bond ETFs.
Disclosure: I am currently long HYG in several client accounts.