Worth the risk? High Yield Junk = 13.29%

[enad]

Only you can really answer that question as everyone's appetite for risk/reward is different. For me, it's not worth the risk so it's not something I would ever invest in. There is a reason it's known as Junk.

[Valuethinker]

What would say about an actively managed ETF with a 30 day SEC yield of 13.29%? Consists of Corporate Junk bonds with CCC ratings. This fund has an ER of 0.40. Holds over 100 securities. I think this might compensate enough for the risk to be worth throwing a little money into for a few years. I would think the risk would be minimized somewhat by the active management and diversification with holdings. Ticker is XCCC. Here is a link to its fact sheet: https://bondbloxxetf.com/bondbloxx-ccc- ... -bond-etf/ Even trades at a discount on occasion. At least it will beat inflation and will probably rise in value with the market. Seems to be less volatile than the overall market too.

I am sure there are pockets of inefficiency. But as per other commentators, an open-ended structure is not a good way to exploit these.

Leveraged Loans are also interesting - I think these loans typically rank ahead of high yield bonds in the capital structures. However there are all kinds of "agency problems" ie in corporate finance theory, the problem that there are parties who are not aligned in interest with debt investors.

[dobieg]

I'd rather put my money in JEPQ with a current yield of 15.89%.

[Grt2bOutdoors]

No. The yield on the coupons might be 13.29% but given the NAV return since inception suggests that the default rate is significantly high enough that the returns are lower than that of an investment grade fund like Total Bond Market Index. I'd rather buy a basket of out-of-favor equities with half the money and put the other half in US Treasuries maturing in 5 years, I like those odds better.

[rule of law guy]

I dont want to get into giving specific investment advice, but buying into a CCC portfolio of junk bonds as we are about to enter into a downturn is not a good idea imo.

if you want yield it might make sense to look at BDCs...look for ones with a long and successful operating history, like Ares. ARCC. more exposure to the entire capital stack rather than just the junior unsecured layer, and much better underwriting with a large BDC than with some junk bond jockey. all imo

[Grt2bOutdoors]

I dont want to get into giving specific investment advice, but buying into a CCC portfolio of junk bonds as we are about to enter into a downturn is not a good idea imo.

if you want yield it might make sense to look at BDCs...look for ones with a long and successful operating history, like Ares. ARCC. more exposure to the entire capital stack rather than just the junior unsecured layer, and much better underwriting with a large BDC than with some junk bond jockey. all imo

Just so long as you are aware that the underlying investments in those BDC's are private and mostly illiquid with most being unrated. There is no free lunch. Getting yield at the expense of NAV erosion is not an investor's idea of a return. One should be prepared to hold this type of investment for a full cycle or longer.

[JackoC]

No. The yield on the coupons might be 13.29% but given the NAV return since inception suggests that the default rate is significantly high enough that the returns are lower than that of an investment grade fund like Total Bond Market Index. I'd rather buy a basket of out-of-favor equities with half the money and put the other half in US Treasuries maturing in 5 years, I like those odds better.

To excerpt from previously probably too long post, Ilmanen in 'Investing Amid Low Expected Returns' gives the interesting stat of 'spread capture' at various rating levels 1989-2020. CCC was 37%, it's arithmetic avg excess return divided spread each period (inherently arithmetic). So if XCCC avg maturity around 5 yrs, expected return on that basis might be (using yesterday's 5 yr though might be unsynchronized) is 3.82+ (13.89-3.82)*.37-~7.5% if it matched the 1989-2020 history, obviously always a big if for anything. It's not realistically '13.89% if things go well', at the kind of rating you'll have significant default in any plausible scenario. BB's capture was 80%. CCC was the second lowest % behind AAA (you basically never have a direct from AAA default, but IG indexes occasionally end up selling AAA's that become junk, and there's so little spread to begin with).

Again I see no fundamental reason to think junk bonds are greatly and consistently mispriced against investors. The professional market is more dominant in junk so it wouldn't be naive retail getting picked off again and again. The neutral assumption would be that's about equal return for risk. The reasonable questions are whether there's a little inefficiency for or against you, more importantly how much it diversifies you, and tax. But tax tends to rule out risky bonds for taxable investment IMO for people in even middle tax brackets.

[secondopinion]

This is an ETF that holds lottery picks

S&P Global defines CCC as a 50/50 chance of default within 12 months. CC is defined as a nearly 100% chance of default but with some possible recovery. C means nearly 100% chance of default but less recovery. These would be comparable to a FICO score in the low 500s.

It depends how the manager picked these bonds. Was it by throwing random darts, or did they do extensive research to find bonds with a good chance for recovery beyond what they paid for the bonds?

The point of buying this ETF wouldn't be for the dividend but for the price appreciation.

You are right on the money here; the hope from holding a general fund of this type is that the CCC yield spread will tighten. Most of the bonds will not escape default, and it is indeed the speculator's realm. XCCC is not like even the usual high-yield bond funds where most of the bonds will not default.

This is an index ETF, so take it for what that is worth.

[secondopinion]

I dont want to get into giving specific investment advice, but buying into a CCC portfolio of junk bonds as we are about to enter into a downturn is not a good idea imo.

The yield spread can be rather high (>15% + risk-free yield + call premium) during bad economic situations. So, I am waiting for a better offer.