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Should I bother with High Yield Corporate Bond ETFs?
June 20, 2021
11:59 pm
saren
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I don't see a lot of these ETF's in portfolios seeking income, but isn't that what "fixed income" is about? Some of the yields on the ETFs are quite high. And many pay Monthly Distributions? Some even have Total 5, 10 Year Returns in the double digits. So my question is how they are not more popular for passive income investors compared to equity ETFs?

June 21, 2021
4:46 am
dougjp
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They just partially and gradually give you back your own money to achieve the artificially high %'s, "whatever it takes".....there should be a law. sf-frown

" We may never pass this way again " - Seals & Crofts

June 21, 2021
5:38 am
Loonie
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I had not heard of these kinds of funds as being the type that give you back your own money. I associate that with "monthly income funds" etc., which achieve a steady income stream by taking whatever is needed out of your fund (if there isn't enough income, then it comes out of principal).
Can you show me examples of what you are referring to?

I recall that back in the 1980s or so, corporate bond mutual funds were very hot items. Altamira and PH&N come to mind. I know ETFs are different, but I wouldn't have thought the difference was dramatic in this kind of fund.

I haven't looked into these in many years, so perhaps I'm off base.

IN general, I would expect bond funds to do poorly in a rising interest environment. Is that still the case?

I think the main advantage of such a fund is diversification among various corporate issues.

June 21, 2021
6:27 am
dougjp
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Loonie said
I had not heard of these kinds of funds as being the type that give you back your own money. I associate that with "monthly income funds" etc., which achieve a steady income stream by taking whatever is needed out of your fund (if there isn't enough income, then it comes out of principal).
Can you show me examples of what you are referring to?

I recall that back in the 1980s or so, corporate bond mutual funds were very hot items. Altamira and PH&N come to mind. I know ETFs are different, but I wouldn't have thought the difference was dramatic in this kind of fund.

I haven't looked into these in many years, so perhaps I'm off base.

IN general, I would expect bond funds to do poorly in a rising interest environment. Is that still the case?

I think the main advantage of such a fund is diversification among various corporate issues.  

Actually I thought what you describe in paragraph 1 was what the poster was referring to. Perhaps the poster was referring to historical yields, in which case its simply info from back when rates were much higher, and/or funds that had very long term high rate bonds.

" We may never pass this way again " - Seals & Crofts

June 21, 2021
6:55 am
Norman1
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Are we talking about those dastardly "monthly income" funds, that advertise an unsustainable payout, or "high yield bond" funds, which hold junk bonds?

Junk bonds can produce wonderful returns when it looks like the issuer will make the interest payments and repay the principal on maturity. But, there can be significant risk that the interest payments and principal will not be paid as originally agreed.

June 21, 2021
7:00 am
COIN
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Norman1 said
"high yield bond" funds, which hold junk bonds?  

The reason they are call "junk" bonds is due to the credit risk of the corporate borrowers. Didn't GM bondholders take a "haircut" when GM was on the verge of bankruptcy in 2009?

June 21, 2021
7:32 am
Norman1
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GM actually didn't make it and went bankrupt in 2009.

Assets, including its name and trademarks, were sold to a new company. GM then renamed itself to Motors Liquidation Company and continued in bankruptcy proceedings.

The new company became General Motors Company LLC.

June 21, 2021
8:50 am
Dean
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Norman1 said

Are we talking about those dastardly "monthly income" funds, that advertise an unsustainable payout, or "high yield bond" funds, which hold junk bonds?

Junk bonds can produce wonderful returns when it looks like the issuer will make the interest payments and repay the principal on maturity. But, there can be significant risk that the interest payments and principal will not be paid as originally agreed.  

Just in case they got missed, I highlighted the 2 most important words

For more details, go here

.

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

June 21, 2021
11:20 am
AltaRed
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High yield corporate bond (junk bond) ETFs behave a lot like equities in times of financial crisis/bear markets. Capital is at considerable risk when non-investment grade bond issues fail or are only worth cents on the dollar. There is no free lunch.

These are much different from investment grade bond ETFs (BBB- and higher) and of course government issued bonds.

I would not remotely consider any below investment grade corporate bond ETFs.

June 21, 2021
12:42 pm
Bill
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saren, I think maybe the answer to your original question is that passive income investors (which I take it includes for you dividend recipients), while realizing that both high yield corporate bonds as well as dividend-paying equities come with some risks, maybe perceive the upside is greater for equity ETFs, i.e. as an equity owner you can participate in the growth of companies in a way you can't with bonds. And maybe too the preferential treatment in Canada for certain dividends via the ever-popular dividend tax credit is another factor.

June 21, 2021
12:45 pm
saren
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Yes I was referring to Junk bond ETFs. I called them High Yield Corporate Bond ETFs. Was considering them for the high yield. For example, 7 or 8%. I already hold ZAG for the government bonds (that's at 3%). Never tried junk bonds. Was only attracted by the yield %.

June 21, 2021
4:52 pm
COIN
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saren said
Yes I was referring to Junk bond ETFs. I called them High Yield Corporate Bond ETFs. Was considering them for the high yield. For example, 7 or 8%. I already hold ZAG for the government bonds (that's at 3%). Never tried junk bonds. Was only attracted by the yield %.  

High yield = high risk

June 21, 2021
6:22 pm
Loonie
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Norman1 said
Are we talking about those dastardly "monthly income" funds, that advertise an unsustainable payout, or "high yield bond" funds, which hold junk bonds?

Junk bonds can produce wonderful returns when it looks like the issuer will make the interest payments and repay the principal on maturity. But, there can be significant risk that the interest payments and principal will not be paid as originally agreed.  

Right. As a fund of bonds, however, the high yield fund attempts to mitigte risk.

As an aside, in my many negative experiences with RBC in respect of my mother's account recently, the RBC advisor who lectured me about how I couldn't do hardly anything on mum's behalf, the very same one who told me I couldn't open a TFSA for her or a savings account or anything that might be called an "investment", offered me an alternative. When I expressed frustration, indeed disbelief, that she could not let me open a simple savings account for mum, she immediately offered me an income fund instead. I was, to say the least, surprised, even bewildered. As I am aware of the structure and pitfalls of monthly income funds, I didn't ask for any details, but you can perhaps understand why I had a sense of the surreal. Here was this apparently very sincere and serious bank rep telling me with a straight face that I couldn't open a savings account but I could open a mutual fund. Huh? I was too stunned to say anything. I just reiterated that I wanted a savings account, not a mutual fund. It didn't give me the impression I was dealing with a reputable institution.

June 22, 2021
7:11 am
Dean
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saren said

Yes I was referring to Junk bond ETFs. I called them High Yield Corporate Bond ETFs. Was considering them for the high yield. For example, 7 or 8%. I already hold ZAG for the government bonds (that's at 3%). Never tried junk bonds. Was only attracted by the yield %.  

.
No matter what the potential yield is ... Junk = Junk ❗
.

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

June 22, 2021
9:08 am
AltaRed
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The thing is if one is going for equity like price behaviour and high single digit returns, but with highly increased risk of non-investment grade holdings, why wouldn't one invest instead in investment grade blue chip common equities with a better track record of total return?

June 22, 2021
4:11 pm
Loonie
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AltaRed said
The thing is if one is going for equity like price behaviour and high single digit returns, but with highly increased risk of non-investment grade holdings, why wouldn't one invest instead in investment grade blue chip common equities with a better track record of total return?  

They probably want more diversification and can afford the risk. In some years these funds have done very well.

OP sees this investment as part of fixed income portion of their portfolio. I'm not sure if that's correct or not because of the risk level, but it probably is.
No matter how rewarding you have found blue chip stocks to be in the past, I wouldn't consider them fixed income. Would you?

June 22, 2021
4:50 pm
canadian.100
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Loonie said

They probably want more diversification and can afford the risk. In some years these funds have done very well.

OP sees this investment as part of fixed income portion of their portfolio. I'm not sure if that's correct or not because of the risk level, but it probably is.
No matter how rewarding you have found blue chip stocks to be in the past, I wouldn't consider them fixed income. Would you?  

Junk bonds/High yield bonds are fixed income not equity - high yield bonds are low or unrated bonds issued by corporations or governments. Remember the bonds issued by Greece - the EU had to bail out Greece by buying their bonds. Don't assume fixed income is no risk and equity is high risk. Junk bonds are generally high risk (and the interest return is commensurate with that risk.) Common shares (i.e. equity) of Royal Bank or Telus or Enbridge are not considered "high" risk.
I knew someone who bought junk bonds years ago - he was very diversified - the bonds and returns turned out fine. I have no interest in junk bonds. Canadian Bank shares (common and preferred) etc. fit my low risk/above average return focus.

June 22, 2021
6:13 pm
AltaRed
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Loonie said

They probably want more diversification and can afford the risk. In some years these funds have done very well.

OP sees this investment as part of fixed income portion of their portfolio. I'm not sure if that's correct or not because of the risk level, but it probably is.
No matter how rewarding you have found blue chip stocks to be in the past, I wouldn't consider them fixed income. Would you?  

Of course, blue chip common equity is not fixed income albeit the investment income stream is probably more sound and reliable than that of junk bond ETFs. Is a growing dividend stream from a blue chip dividend ETF not more reliable than interest from junk bonds? If no, please define fixed income then.

The problem is there certainly is high risk of capital loss when some issues within the junk bond ETF go insolvent.

Added: Example for TSX60 (largest 60 stocks in Canada) as represented by XIU ETF. https://www.dividendchannel.com/symbol/xiu.ca/ There is both a graphical and tabulated history of distribution payout per unit since inception circa 2000. XIU distributions are approximately 5 times higher today than 20 years ago meaning that someone who had bought 1000 units of XIU in 2000 would have income distributions today 5 times more than they would have in 2000. Have the distributions from a junk bond ETF have done anything other than being flat (or less) over the past 20 years.

For the OP, here is a discussion by PWL on junk bond ETFs https://www.pwlcapital.com/spotlight-on-high-yield-bond-etfs/

June 22, 2021
10:20 pm
Norman1
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Junk bonds are fixed income securities in form. But, they are not fixed income in substance. Their returns reflect that.

The investment objective of the PH&N High Yield Bond Fund:

To provide a high level of income and the opportunity for capital appreciation by investing primarily in a well-diversified portfolio of fixed income securities issued by Canadian and/or foreign corporations and governments.

Capital appreciation is not an expectation of fixed income.

Keep in mind that junk bonds are a very diverse group. Not all of them are on the verge of default.

I had quite a few junk bonds in my portfolio last year. They are now gone after they matured and paid out. I still have the PH&N fund.

June 23, 2021
1:12 am
Loonie
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I don't think it matters much what category I consider junk bond ETFs to be. All I was trying to get at is that OP seems to consider them as part of the income side of their portfolio, a zone normally occupied by cash, GICs and bonds of various types and forms, and i think that is fairly standard.

Blue chip stocks may provide a reasonably steady income in dividends but that does not make them income investments; they are still considered equity investments as I understand it. The basic difference is whether you are buying into bonds or equities, not performance per se. In other words, junk bond ETFs and S&P60, whatever their results, are not meant to be directly comparable. Similarly, bonds bought outright or GICs are not directly comparable to equity purchases - although some members of this forum go on repeatedly trying to do so. They aren't supposed to be comparable. They are not comparable because they occupy different portions and functions in a portfolio. You can argue, if you want, that blue chips should be seen as fixed income and that junk bond funds shouldn't, but it makes no sense because they aren't the same. The risk may be comparable but the underlying investments are different in substance as well as form.

The point of the income side of a portfolio, as you know, is not to necessarily match or exceed the equity side, but to provide some balance to it.

I don't think anyone would recommend that the income side should be entirely populated by junk bonds or junk bond funds, but if you buy a fund with a good history and good management, you would be justified in thinking you will make reasonable gains over time. The PH&N fund alluded to is a good example. It's been around for decades, RBC has not ruined it, and it has an average return since inception of 6.5; one year is 13%; it's almost always in the first quartile of its category. Some investments within it may have gone sour, but that is why you buy a fund not individual bonds. https://www.rbcgam.com/en/ca/products/mutual-funds/RBF5280/detail

I am not for them or against them, but they have a place, if you are careful about which one you buy and they only form a portion of your fixed income side. If you want, you can ALSO buy blue chip stocks for your equity side. Just don't think of them as either/or comparables. Blue chips will be mature businesses; junk bonds are more likely from more junior businesses. In that respect and in the nature of the investments, they provide good diversity from each other.

I think the term "junk bond" sends the wrong message. They are not garbage; they just have lower ratings and higher risk than other bonds (govt or corp). There are much riskier investments out there than junk bond ETFs. "High yield" isn't entirely accurate either, as they may not always be producing high(er) yields, but at least it is not pejorative. I would call them "higher risk bond ETFs".

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