High Yield ETFs: Another Approach to Stock Market Uncertainty?

Dick Bove, a legendary financial company analyst at Punk Ziegel, exclaimed that the financial crisis had effectively ended with the collapse of Bear Stearns (BSC). Moreover, Bove believes that the opportunity to invest in banks at prices this attractive comes only once every 20 years.

Not everyone agrees with Mr. Bove, of course. For the sake of possibility, however, let's assume that the worst of the credit crunch has been taken into account by the stock and bond markets. What ETFs might a more moderate investor consider as an alternative to the rough-n-tumble S&P SPDR Select Financials (XLF)?

In a column that I wrote a few weeks ago, I suggested that economic recovery might benefit high yield corporate bonds. The reason? General appetite for risk goes up when the prospects for a country's GDP improves.

Yet now I am seeing a different possibility for high yield corporates; that is, they may perform rather nicely... even without a 2nd-half recovery for the U.S. economy.

After 9+ months of increasingly hard-to-find credit and widening bond spreads, the Fed's aggressive actions are likely to change the course of these actualities; specifically, credit will "uncrunch" and bond spreads will revert to a norm.

With investors pushing bond spreads back towards "normal," either by selling treasuries to purchase high yield or by selling more treasuries than they sell high yield, high yield corporates would benefit handsomely. That is, even without capital appreciation, both the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Lehman High Yield Bond Fund (JNK) offer 8%+ distribution yields.

The income is paid out monthly here, a huge positive. And it would be hard to argue against the reasonable nature of this particular risk-reward relationship.

Since the run on Bear Stearns in the 3rd week of March, the iShares iBoxx High Yield Corporate Bond Fund quietly added about 3.2%. Naturally, the capital appreciation is an added benefit for the yield-seeking investor.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[silver-bullet:]

May I add that for retirees, it is important to own gold. A leveraged way to own the metal is via the ETF: GDX. It holds the major gold miners' stock that have proven assay reserves beneath the ground.

GDX goes for about $50, it's like owning an ounce of gold for $50! With inflation, soon the general public will catch on to gold and silver. When that happens, there will not be sufficient physical metal to go around. Holding the claim to the metal will be the next best thing.

2008 Apr 16 01:13 AM