FIVE JUICY HIGH-YIELD BOND ETFS FOR 2012

January 20, 2012
Article from Financial Advisor (FA)
By Stoyan Bojinov

(ETF Database) Equity markets have gotten off to a solid start in the new year, although looming Euro zone debt woes continue to breed some degree of pessimism and one piece of bad news from overseas is very well capable of sparking a broad sell-off that spills over onto Wall Street.

The tug of war between positive economic data releases on the home front and turmoil in Europe continues, paving the way for volatile trading across asset classes as investors struggle to decipher which way the markets will tip next. Amidst the ongoing uncertainty, many investors are gravitating towards dividend-paying securities, particularly in the fixed-income corner of the market, in an effort to favorably position themselves as the global financial drama develops in 2012.

High-yield bonds, commonly referred to as “junk bonds”, have taken on great appeal amongst investors looking to beef up their portfolios’ current return and further diversify their bond component. 

With government debt woes still plaguing confidence in the markets and expectations for interest rates to remain low in the foreseeable future, it’s not much of a surprise to see investors opting for dividend-paying securities in the bond space in lieu of chasing after lucrative stock market returns.

High Hopes For “Junk” Debt

Despite the rather unappealing “junk bond” label, high-yield corporate debt may be one of the few bright spots in 2012 for those looking to enhance their current return without taking on considerable risk. While U.S. Treasuries are undoubtedly one of the “safest” segments of the bond market, their rock-bottom yields leave much to be desired [see International Bond ETFs: Cruising Through All The Options].

Furthermore, government bonds may come under pressure over the coming year if economic conditions at home continue to improve, which would in turn prompt investors to reallocate capital to more attractive corners of the market.

Investing in high-yield bond segment may appeal to investors for a variety of reasons––first and foremost, the underlying fundamentals of this asset class suggest that the inherent risks are significantly fewer than many might expect.

According to Fitch Ratings, the default rate for U.S. companies in the high-yield universe is expected to be around 2.5% to 3%, well below the historical long-term average annual rate of 5.1%. Relatively lower rates of default translates into a more attractive risk/return profile for junk bond investors.

Another compelling piece of evidence from J.P. Morgan is the fact that high-yield issuers are becoming more and more profitable, and leverage in the space has been broadly, and steadily decreasing since peaking in late 2009. Additionally, improving economic conditions coupled with robust corporate earnings (and record levels of cash on hand) are two key factors that may further reduce the risks associated with high-yield debt notes.

Compelling fundamental improvements in the junk-bond space make this space difficult to ignore given the juicy dividends that are sure to impress even the most yield-hungry investors.

Below we highlight five intriguing funds from the High Yield ETFdb Category that may perform well in 2012:

• iShares iBoxx High Yield Corporate Bond Fund (HYG): This is the biggest offering in the space with nearly $11.7 billion in assets under management. HYG holds over 450 high yield, U.S. dollar-denominated corporate debt notes and had a recent 30-day SEC yield of 7.23%. This ETF is well diversified from a sector perspective and is also available commission free to Fidelity account holders.

• SPDR Barclays Capital High Yield Bond ETF (JNK): This ETF features similar exposure to HYG, although it offers a bit less in the way of diversity. JNK’s underlying portfolio consists of roughly 220 holdings and is tilted toward debt notes from companies in the industrial sector. This ETF had a recent 30-day SEC yield of 7.41% and is also available commission free to TD Ameritrade account holders.

• PowerShares High Yield Corporate Bond Portfolio (PHB): This ETF separates itself from traditional “junk bond” ETFs by employing a fundamental approach that assigns weights to individual debt holdings based on four factors: book value of assets, gross sales, gross dividends, and cash flow. PHB charges a competitive 0.50% expense ratio and had a recent 30-day SEC yield of 5.47%.

• PIMCO 0-5 Year U.S. High Yield Corporate Bond Index Fund (HYS): This fund tracks the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index, which consists of 150 U.S. dollar denominated corporate debt securities rated below investment grade with remaining maturities of less than five years. HYS has a recent 30-day SEC yield of 7.16%.

• Guggenheim BulletShares 2012 High Yield Corporate Bond ETF (BSJC): This bond ETF is unlike the majority of fixed-income products as it tracks an index designed to represent the performance of a held-to-maturity portfolio of U.S. dollar-denominated high-yield corporate bonds with effective maturities in 2012. BSJC has little in the way of interest rate risk and should bear relatively low credit risk as well seeing as how the principal amounts of the underlying notes will be repaid during the current calendar year. This one-of-a-kind bond ETF has a recent 30-day SEC yield of 4.94%.

ETFdb offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com.

Article from Financial Advisor (FA)

Corporate Bonds Rally As Fears Recede

By Patrick McGee
Of DOW JONES NEWSWIRES

JANUARY 20, 2012, 5:53 P.M. ET
Article from The Wall Street Journal

NEW YORK (Dow Jones)--Investors were snatching up bank bonds in the secondary market this week, pushing yields to multi-month lows as risk-perception in Europe subsides.

Investors showed follow-through buying on bank bonds offered to the market Thursday, when Goldman Sachs Group (GS), Citigroup (C), and Bank of America (BAC) offered a combined $7 billion of new debt.

"The fact we could absorb all that supply in a day is very telling," said John D. Ryan, portfolio manager at DWS Investments, who said investor appetite for riskier assets has picked up globally. "With rates where they are at, we've definitely seen a flood of issuance from quality issuers."

The three banks accounted for nearly half of the $14.5 billion of investment-grade debt issued this week, according to Dealogic. The first two weeks of the year saw $23.1 billion and $28.8 billion of volume.

In the primary market, yields are so low that banks can offer a decent-sized concession to entice investors, yet still be enthused with the overall low borrowing cost.

"They are happy with the all-in yields, and we are happy with 20-30 basis point discounts to where things were trading," Ryan said.

Yet just one borrower opted to take advantage of the favorable conditions Friday, and no senior unsecured debt was on offer.

The Bank of Nova Scotia (BNS) sold $2.5 billion of five-year covered bonds Friday, pricing the 1.95% coupon bonds to yield 1.977%, or 109.1 basis points over the Treasury rate.

That represents about 63 basis points in savings compared to Scotia's senior unsecured offering earlier this month, when it sold $1.25 billion of 2.55% coupon, five-year senior unsecured bonds priced to yield 2.593%, or 172 basis points over Treasurys. The Jan. 5 sale was part of a three-tranche, $2.75 billion offering rated Aa1 by Moody's Investors Service and AA-minus by S&P.

The three major deals from Thursday were some of the most actively-traded bonds in Friday's market.

The risk premium, or spread, on Goldman's 10-year bonds improved 17 basis points from issuance to 363, and the spread on Citi's 30-year bonds tightened 12 basis points from issuance to 285, MarketAxess data shows.

Bank of America's 10-year bond was the outlier, as the spread actually widened, or deteriorated, two basis points from issuance to 380 basis points.

Markit's CDX North America Investment Grade Index, a measure of health in the corporate bond market, was on track to improve 1.8% to 105.9 basis points, which would be the lowest closing level since August 5, when it was at 103. A lower level indicates improving sentiment.

On Thursday, Barclays Capital investment-grade corporate bond index improved one basis point to a spread of 221 basis points, the narrowest spread since November 14. The index has improved four basis points this week and 13 basis points year-to-date.

"People definitely came into this year more bulled up," Ryan said. "People are getting more comfortable that liquidity won't be a problem even if insolvency problems in Europe are unresolved."

The multi-day bond rally was initiated by a non-event--the absence of a market sell-off early this week following the Standard & Poor's move last Friday to downgrade nine euro-zone countries. The move stripped France and Austria of triple-A ratings, and lowered Italy by two notches to BBB-plus from single-A.

"The expectation was that European markets would react negatively, and they basically ignored it," said Mark Alexandridis, managing director of asset management at First Principles Capital. "All of these downgrades have been priced in. I don't think there was a soul on the planet who thought Italy was a single-A country last Thursday."

-By Patrick McGee, Dow Jones Newswires;             212-416-2382      ; patrick.mcgee@dowjones.com

Article from The Wall Street Journal

Are Muni Bonds Still Smart?

JANUARY 18, 2012, 7:41 P.M. ET
Article from Smart Money

Municipal bonds were among the few breakout stars of 2011, but some advisers warn the hot streak may fizzle out.

By JONNELLE MARTE

In last year's upside-down market, the once-forsaken muni bond became a surprise hit, offering investors safety and solid returns. But as their popularity continues to grow, some pros are warning investors their stellar run may be coming to an end.

With the fears of defaults now a distant memory, investors plunged nearly $5 billion into municipal bond funds in December -- the category's highest total in 16 months, according to fund researcher Morningstar Inc. That's a sharp reversal from the 5-month period that ended in May, when they yanked nearly $23 billion from these funds. And the money is still flowing in: municipal bond funds, including exchange-traded funds -- drew in in $1.1 billion for the week ended Jan. 11, their highest amount since March 2010, according to fund tracker Lipper.

Why the stampede back into municipal bonds? For starters, advisers say many investors who were spooked by grim predictions for large defaults in the municipal-bond market last year are returning now that it hasn't come to pass. Other investors are likely chasing returns, analysts say. The average long-term national muni-bond fund gained 9% in 2011, compared to a 2.1% gain for the S&P 500, according to Morningstar. "I don't think anybody was predicting such strong returns, says Jim Colby, senior municipal strategist and portfolio manager for Van Eck Global.

And while yields on the bonds hit record lows last week, advocates say the bonds still pay better yields than other kinds of bonds. The weighted average yield of bonds in the S&P National AMT-Free Municipal Series 2021 Index, which tracks investment-grade, tax-exempt municipal bonds, was 2.4% at the end of December, for a taxable equivalent yield of 4.35%. That compares to 1.9% for a 10-year Treasury bond. "We're still finding attractive yields," says Dan Loughran, senior vice president of OppenheimerFunds and leader of the Rochester municipal investment team.

Still, muni-bond bears say these investments are plenty risky. As part of the federal government's effort to reduce its massive deficit, several lawmakers -- as well as President Barack Obama -- have proposed cutting or eliminating the tax break on income from municipal bonds for high earners; as of now, muni-bond income is tax-exempt. If that tax exemption vanished, investors would demand higher yields, and muni-bond yields would jump dramatically, says , says Matt Fabian, managing director of Municipal Market Advisors, a market research firm. Bond prices fall when yields rise.

Another potential blow: approval of the so-called Volcker rule, a proposal that aims to limit the bets banks make with their own money, could reduce the number of banks buying municipal bonds, which could lower bond prices, says Fabian. And hot interest municipal bonds have seen over the last couple of months could backfire if an event spooks investors and causes them to flee from the funds, warns Fabian. "As fast as they're putting money in they can pull money out," he says.

On top of that, the recent rise in popularity is pushing down yields even just this year, giving the upper hand to issuers, who get to borrow at lower rates, says Fabian. For example, a standard Triple-A rated municipal bond yielded 1.73% as of Jan. 18, down from 1.93% on Jan. 2, according to Municipal Market Advisors. Even fans point out that muni-bonds' best days may be gone. "We've had yield plus price appreciation because the market has rallied," says Loughran,. "But I encourage people not to expect that from municipal bonds going forward."

Article from Smart Money