"Although high yield corporate bonds have rallied 20% off their lows, I think there is less risk in debt than in equities right now," says Glenn Rogers.
Here, the contributing editor to Gordon Pape's Internet Wealth Builder takes a look at a trio of ways to play "junk" bonds, adding, "I think this is the trade of the year offering relative safety with high yields and excellent potential for capital appreciation."
"I'm talking about corporate high-yield bonds -- okay, junk bonds -- and municipal issues here, not Treasuries, which I believe are headed for a big fall.
"People won't accept a zero return for long and will seek out better-performing asset classes as their fear subsides. Unless you foresee a lengthy period of deflation coming up (and I don't, despite the latest U.S. CPI numbers) then Treasuries aren't the long-term answer.
"In the recent bailouts, debt holders have been treated far better than equity investors, a trend that may well continue.
"Also, with the Fed backstopping the major banks and credit companies, it's not likely that bond issuers will default unless things get even direr than they are now. Even if that happens, the equities will crash first.
"At current levels, corporate bond yield spreads are discounting a lot of trouble and I think that makes them worthy of your attention. Let the stock market do its own thing for a while and go in another direction. There are three exchange-traded funds that let you play the U.S. high-yield bond market:
"SPDR Barclays Capital High-Yield Bond ETF (NYSE: JNK) tracks the performance of the Barclays Capital High Yield Very Liquid Index.
"This index includes publicly-issued U.S. dollar non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year and have $600 million or more of outstanding face value. It holds 112 positions, making it the broadest of the three ETFs.
"PowerShares High Yield Corporate Bond Portfolio (NYSE: PHB) seeks to replicate the Wachovia High Yield Bond Index.
"This Index measures potential returns of a theoretical portfolio of high-yield corporate bonds that are rated below investment grade by Moody's, S&P, or Fitch and are payable in U.S. dollars. It pays monthly distributions and shows a current yield of 13.49%. The fund covers 52 positions.
"iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) is the one I prefer. It is designed to track the performance of the iBoxx $ Liquid High Yield Index, a corporate bond market index compiled by the International Index Company Limited.
"Most of the bonds in the portfolio are rated BB- or less so we are really talking about the corporate trash heap here. The overall fund rating from Standard & Poor's is B-. There are about 50 positions in the portfolio.
"This ETF has not been a stellar performer until recently. It lost almost 24% in 2008 as corporate bonds were hammered in the flight to Treasuries. But the tide shifted recently and in December the fund gained 9.9%. I think there is more upside potential.
"The fund pays monthly distributions and is currently showing a cash yield of 8.32%. It has a low MER of 0.5%. I personally own shares of this one and I am added it to my list of recommendations at the current price of US$75.99.
"The ETFs hold companies like Hertz, ALLTEL, Dollar General, L3 Communications, and Peabody Energy. I think this is the trade of the year offering relative safety with high yields and excellent potential for capital appreciation."
