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Should I bother with High Yield Corporate Bond ETFs?
June 23, 2021
7:39 am
AltaRed
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Where I was trying to get too was to suggest junk (high yield) bonds should be treated more like equity, and perhaps non-investment grade equity. They behave that way in terms of investor risk and returns.

While they are indeed different in both substance and form, they both have capital and income risk that one's portfolio can't really use for the ballast portion of one's portfolio. I agree the PH&N high yield bond fund has been the bellwether in this space and the best way to characterize it is to lay a 20 year chart of it over XIU or similar.

June 23, 2021
8:17 am
canadian.100
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The PH&N high yield fund unit value benefitted from the big drop in interest rates; however, if we actually move into a period of rising interest rates, that will negatively affect unit value /returns of all bond funds. Of course, an invest and hold strategy for the long term will generally have positive results, whether you are in bonds and/or shares. I have owned Balanced Funds in the past and they were a good way to diversify one's fixed income and equity.

June 23, 2021
4:49 pm
Loonie
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I hear you, AltaRed, but I would still put high yield bond funds on the Income side. As canadian100 has said, and I suggested above (#3) and as you know, almost all bond funds will falter in a rising interest rate environment. So, for consistency, if you put the highest risk bond funds in the equity category because they might lose money, then you would also have to put all the other bond funds in the same group because they too can lose money, at least in the shorter term. This would leave you with only cash, GICs and individual bonds. Perhaps you prefer it this way. I think it confuses people to do so when the industry doesn't, and that the best defense is just to be aware of what you are getting into and diversify.

If we want to dig a bit deeper into this, every investment has risk, even GICs and individual bonds. Risk comes from a variety of sources but it all boils down, not to the rate of return you got, but to the impact on your purchasing power. If you win on the rate of return but the purchasing power of your dollars drops more, then you lose, whether it's stocks or GICs. In that sense, all investments, whether income or equity side, are on a continuum of risk and the division is fuzzy.

Those who are concerned about rising interest rates and their effect on bond funds might want to look at Real Return bond funds, assuming they still exist. That's the only kind of bond fund which is designed to compensate for rising rates.

June 23, 2021
6:24 pm
Bill
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FWIW, maybe a bit different perspective, but when people (usually younger relatives) who know nothing about investing ask me where to put their money I say my view is at the end of it all basically there are only two choices: return of capital guaranteed (essentially gics & bank accounts, returns (in my view) insignificant) vs all the various markets (i.e. everything else where return of capital isn't guaranteed, possibility of higher returns as well as of losses/gains of capital), what % of your money do you want to put in each? As a starting point. (Usually they can't figure that out so luckily I never hear back from them, phew!)

So all bond and equity funds/investments, for me, fall into the same category, albeit there's obviously quite a range of risk within it.

June 23, 2021
8:45 pm
AltaRed
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Loonie said
Those who are concerned about rising interest rates and their effect on bond funds might want to look at Real Return bond funds, assuming they still exist. That's the only kind of bond fund which is designed to compensate for rising rates.  

RRBs do indeed exist and there is even a (useless) ETF for RRBs. FWIW, I agree with you that high yield bonds are interest rate sensitive like all bonds.

That is not the primary issue in my opinion. It is the increased risk of capital loss due to the insolvency of some of non-investment grade bond holdings. There are many real life examples of high yield bonds going to zero. That is where an actively managed fund like the PH&N mutual fund likely earns its keep. The managers can ditch a failing issue at perhaps 50 cents on the dollar rather than holding on to it until it goes to zero.

As a minimum, no one should buy an 'index' (passive) ETF on these high yield bond things. That is akin to standing in the express lanes of the 401 at rush hour.

June 23, 2021
10:47 pm
Loonie
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I think we more or less agree, AltaRed!

Certainly, any bond could go to zero, and especially the lower-rated "junk" ones. But that should not be a huge factor in deciding whether to invest in a bond fund.
A well run fund is never going to let itself get into a position where the failure of one or two or three of the investments ruin the fund, as they will ensure that each investment is a small portion of the whole (with exception of govt issues).
I'm sure you know this, and it can be seen by the results of PH&N that a relatively smooth ride can be had. They've been doing it for a long time.
The bigger risk of bond funds and bonds in general, in my view, is rising rates, which will affect returns on all except RRBs.

June 24, 2021
4:38 am
savemoresaveoften
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Loonie said
I think we more or less agree, AltaRed!

Certainly, any bond could go to zero, and especially the lower-rated "junk" ones. But that should not be a huge factor in deciding whether to invest in a bond fund.
A well run fund is never going to let itself get into a position where the failure of one or two or three of the investments ruin the fund, as they will ensure that each investment is a small portion of the whole (with exception of govt issues).
I'm sure you know this, and it can be seen by the results of PH&N that a relatively smooth ride can be had. They've been doing it for a long time.
The bigger risk of bond funds and bonds in general, in my view, is rising rates, which will affect returns on all except RRBs.  

One thing to learn is "never say never". No one before 2009 would ever think rates can go to zero or even negative. Also for those who have been investing long enough, let me remind you of LTCM. Not trying to scare anyone, but never have the mindset of a "safe" trade. Shorting GME was a no brainer trade to the brightest investment professionals in the world until the Reddit little guys crash the party big time.

https://www.investopedia.com/terms/l/longtermcapital.asp

June 24, 2021
9:21 am
Dean
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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?  

    Amen to that ⬆

I'll take Dividend paying Blue Chip Stocks, over High-Risk 'Junk' Bonds
... Any Day ❗

    Dean

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

June 24, 2021
5:04 pm
topgun
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Dean said

    Amen to that ⬆

I'll take Dividend paying Blue Chip Stocks, over High-Risk 'Junk' Bonds
... Any Day ❗

    Dean

  

I am a firm believer in Dividend paying Blue Chip Stocks.

Have a Great Day

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