After the Federal Reserve’s decision to pump more money into the economy by purchasing assets, such as corporate bonds, it might seem like riskier debt like high yield will soon follow. However, there isn’t light at the end of the tunnel just yet, and fixed income investors should take note and become friends with quality.
In today’s flight to safety amid the coronavirus pandemic, it might seem that the riskiest assets like high yield bonds might be completely out of favor. However, when it comes to seeking yield in this low-rate environment, fixed income investors haven’t completely turned away from high yield bonds, but investors must still take caution.
Though the markets seem like they’re recovering, it doesn’t put high yield debt in the clear. As such, investors should make sure they select quality debt.
“The high-yield bond market might be rebounding, but strategists are warning that there could be more pain to come—Citigroup says that more than 10% of the market could default,” a Barron’s article noted. “Risky markets rallied in early trading on Monday, with the S&P 500 index up 3.8%, the Dow Jones Industrial Average up 3.9%. The two biggest high-yield bond exchange-traded funds rose as well: The iShares iBoxx $ High Yield Corporate Bond ETF (HYG ) advanced 1.9% and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK ) gained 1.7%.”
Investors looking at high yield options can opt for The High Yield ETF (HYLD ), which seeks high current income with a secondary goal of capital appreciation by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper. Another option is the VanEck Vectors EM High Yield Bond ETF (HYEM ), which seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
A Quality Yield Option
Additionally, investors don’t have to stick to just high yield bonds, but quality-focused issues in equities that mine for yield. In this case, it’s the Principal Shareholder Yield Index ETF (PY ).
PY seeks to provide investment results that closely correspond to the performance of the Nasdaq US Shareholder Yield Index. The index uses a quantitative model designed to identify equity securities (including value stock) of mid- to large-capitalization companies in the Nasdaq US Large Mid Cap Index (the “parent index”) that exhibit high degrees of sustainable, shareholder yield.
This article originally appeared on ETFTrends.com.