HomeMost PopularIncreasing Quality Traits Could Diminish Junk Bond Risks

Increasing Quality Traits Could Diminish Junk Bond Risks

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In the world of corporate bonds, there’s either investment-grade or non-investment-grade debt, also known as a junk bond.

Junk-rated corporates typically earn that dubious status because of debt burdens and other balance sheet woes at issuing firms. However, buyers of non-investment-grade are compensated for related risks in the form of higher yields. For risk-tolerant income investors, those elevated yields enhance the appeal of exchange traded funds such as the Eaton Vance High Yield ETF (EVHY).

Confirming that its income proposition is stout, the actively managed EVHY sports a 30-day SEC yield of 6.35%. That’s impressive when factoring in the ETF’s modified duration to just 3.56 years. Fortunately, there are more positive chapters in the EVHY story.

Evaluating EVHY Prospects

Among the primary reasons advisors and fixed income investors might want to consider an ETF like EVHY over the near term is that diminished expectations of U.S. economic contraction support the upside for junk bonds. So much so that many bonds in this space are starting to look like investment-grade equivalents.

β€œSome 48% of high-yield bonds by par were trading inside of 200 basis points at the end of April, according to the bank. Earlier episodes of notes trading at these levels coincided with Federal Reserve hikes or pauses, only to be abruptly derailed by interest rate cuts,” reported Olivia Raimonde for Bloomberg, citing Bank of America.

EVHY is actively managed. Additionally, it has the flexibility to potentially enhance the quality proposition offered to investors by minimizing exposure to default risk and the lowest-rated corporates. For example, the ETF currently allocates just 1.53% of its portfolio to bonds rated CCC or lower. Conversely, 88% of the fund’s holdings reside in the BB and B camps.

Still, the economic backdrop remains conducive to owning high-yield corporate debt. Many fixed income investors are clamoring for the Federal Reserve to cut interest rates. However, such action could signal the central bank is concerned about the state of the economy. It could prompt investors to eschew riskier corners of the bond market. In other words, rate cuts could be counterproductive for junk bonds. Fortunately, reduced recession risk could be supportive of ETFs like EVHY.

β€œWhile interest rate cuts are expected to be coupled with a cooling economy, fears of a recession have subsided, buoying riskier credits that would suffer from a downturn in growth,” according to Bloomberg.

For more news, information, and analysis, visitΒ TheΒ ETFΒ Yield Channel.

Read more on ETFTrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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