Junk Bonds Outperform Stocks

Junk bonds continue to outperform stocks on the year as the asset classes compete for investors’ increasing appetite for risk.

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The SPDR Barclays Capital High Yield Bond ETF (JNK) is up nearly 22% this year compared to only 7% for the SPDR S&P 500 (SPY).

The $2 billion JNK fund invests in non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year and are high-yield using the middle rating of Moody’s, S&P, and Fitch, respectively,  Top holdings include HCA (9.25%, due 11/15/2016),Intelsat Jackson Holdings (11.25%, due 06/15/2016), CHS/Community Health Systems (8.875%, due 07/15/2015) and GMAC (6.875%, due 09/15/2011).

Investors who are enthusastic about high yield bonds don’t see default risk as a big issue. A recent WSJ article quotes junk investors as predicting that even if the default rate on high-yield corporate debt hits 14%, returns on the remaining junk bonds would be more than enough to offset the losses.  The yield to maturity on JNK’s portfolio is 12.48%.

For more ETF investing choices, see the ETF Directory for a complete listing of fixed income-high yield ETFs.