With investors having few choices to not only get a return beating inflation, but any return at all, why not look at high yield bonds? Treasuries are atrocious with a 2-year yielding just .25% and the 10-year right near all-time lows at just 2.0%, while checking, savings, and certificate of deposits give returns right near 0% as well. However, if we look at high yield bonds, also known as junk bonds, the current payouts are far superior and right near record spreads. Moreover, default rates are below 2% for the first time since 2008 and among the lowest in history, signifying that the risk isn't so great. Below are some of the managed funds that I recommend since investing in in individual high yield bonds can be tricky and costly when looking to get the proper diversification.
PIMCO High Income Fund (NYSE:PHK) is a closed ended fixed income mutual fund launched and managed by Allianz Global Investors Fund Management. The fund is co-managed by PIMCO. It invests in public fixed income markets across the globe. The fund invests in U.S. dollar-denominated, high-yield, corporate debt obligations. It employs fundamental analysis along with a top-down, stock-picking approach to make its investments. PHK has had a consistent $.122 monthly dividend since inception in 2003, meaning it has been very well battle-tested through many different market cycles in the last decade. Moreover, it has arguably the best bond management team in the business and currently has an annual yield of $1.46 translating into a 12% dividend yield.
The SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) is enticing as well with a monthly dividend right near 8% as I mentioned here. The fund seeks to invest at least 80% of assets into high yield bonds, which at first glance seems risky. However, JNK is very well diversified with its top 10 holding only comprising just over 11% of total assets. JNK is a nice buy.
The iShares High Yield Corporate Bond Index (NYSEARCA:HYG) is similar in the make-up as JNK and also has a monthly dividend right near 8% as I brought up previously here. Moreover HYG is very well diversified as well with its top 10 holdings only comprising approximately 5% of total assets.
Western Asset High Income Fund II Inc. (NYSE:HIX) is a closed-ended fixed income mutual fund launched and managed by Legg Mason Partners Fund Advisor, LLC. The fund is co-managed by Western Asset Management Company, Western Asset Management Company Limited, and Western Asset Management Company Pte. Ltd. The fund invests in the fixed income markets across the globe. It invests in securities of companies that operate across diversified sectors. The fund invests in high yield debt securities issued by U.S corporations, foreign corporations and foreign governments. It employs a combination of quantitative and fundamental analysis with a bottom-up security selection process to create its portfolio. HIX has a consistent monthly dividend as well, just over 10% currently, providing some nice diversification with these other holdings.
Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (NYSE:WIW) offers some nice diversified protection in the form of inflation linked assets. Moreover, we brought up recently a big investor who has a large stake in WIW here. WIW offers less yield at 3.2% than the other options, but still significantly more than US government bonds and/or a savings account, while giving investors some nice protection against inflation.
Moreover, if investors want to hedge these bets, the ProShare UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) does that as well. The fund seeks to replicate 200% the inverse of daily performance of US government bonds (NYSEARCA:TLT). It should be noted though that these ultra ETFs, such as TBT, decay in value over time due to considerably higher than average management fees and frictional costs due to the daily rebalancing of portfolios.