Junk Bond ETFs: Yields Too Good to Be True?
Thursday, November 12th, 2009Michael Johnston submits:
When constructing the fixed income component of portfolios, most individual investors and financial advisors focus primarily on debt issued by the U.S. government and high quality corporate debt. But the fixed income universe goes far beyond Treasuries and investment grade corporate bonds. Many investors have embraced junk bonds as quasi-hybrid investment, a bridge between equities and lower risk fixed income securities.
Junk bonds, also known as high yield bonds or speculative grade bonds, refer to debt issued by corporations that is rated below investment grade by major ratings agencies (i.e., S&P, Moody’s, and Fitch). Debt is given a speculative rating if there is deemed to be a higher risk of default or other negative credit events. In order to make these debt issues attractive to investors, junk bonds generally pay a higher yield than investment grade bonds.
