“Individual investors have become enamored with high-yield (junk) bonds lately, seeking to better the puny yields offered by Treasury and investment-grade corporate bonds.
Indeed, junk bond mutual funds have seen a net inflow of $6.1 billion in January and almost $17 billion over the past year, Morningstar reports.
With the economy rebounding, investors are growing more confident that junk bond issuers won’t default. Junk bond funds have offered a return of 5.2 percent so far this year.
“High-yield bond funds do offer the potential for higher returns than high quality bonds and may be used to complement core bond funds with lower risk profiles,” Morningstar editor Adam Zoll writes.
But he warns that junk bonds can plunge, just like they did during the financial crisis, dropping 26 percent in 2008.
Morningstar recommends three funds for their high returns and low risk: Vanguard High-Yield Corporate (ticker: VWEHX), Janus High-Yield (JNHYX), and Metropolitan West High Yield Bond (MWHYX)….”
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