Are high-yield bond funds worth the risk?
In a low-interest rate environment where traditionally higher-yielding investments are paying out a historically meager 3.5%, many investors and advisors are grappling with that question.
One one side of the trade is industry giant Vanguard, whose global head of fixed income, John Hollyer, told CNBC’s “ETF Edge” on Monday that the environment remains supportive for high-yield investments.
“The fundamentals for high-yield issuers are quite good,” said Hollyer, also a principal at the firm. “We have an economy that’s reopening. We have very strong fiscal policy. We have very supportive monetary policy. That makes a good environment for corporate borrowers.”
While investors should set realistic expectations in terms of returns — somewhere in the 3.5% to 4% range — that payout should stay consistent through the near to intermediate term, Hollyer said.
“Until inflation is demonstrably above 2% for an extended period like 12 months and employment has neared full employment across many different subsectors of workers, the Fed is going to hold out from tightening,” he said.
“Compared to past periods, returns may not be as generous, but there’s good reason to believe that the returns embedded in a 3.5% yield will be earned over those near to intermediate terms.”
For others, the potential reward doesn’t seem worth the risk.
These days, money managers tend to use the bond market for diversification rather than yield payout, said Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.
“Most folks that I’m talking to who are looking for yield are actually more likely to go into the equity market, either looking at high dividend yields or looking at any number of yield-generating options on the market” including the options market itself, Nadig said in the same “ETF Edge” interview.
“It just doesn’t seem like you’re getting enough of a reward … from a raw return perspective,” he said. “When you can actually extract a few percent out of high dividend yields, it seems tricky to justify the move into high yields.”
The U.S. 10-year Treasury yield traded just above 1.5% on Friday.