With income trusts facing new rules in 2011, investors are looking for other income-producing securities to fill the gap. Many are looking for a one-two punch of dividend-paying stocks and high-yield bonds.
Four new ETFs holding high-yield bonds have appeared in the past 12 months: the BMO High Yield US Corporate Bond ETF (ZHY) was first on the scene, launching last October. In January, the Claymore Advantaged High-Yield Bond ETF (CHB) and iShares U.S. High Yield Bond Index Fund (XHY) appeared within weeks of each other. More recently, on September 22, BlackRock added the iShares DEX HYBrid Bond Index Fund (XHB), the first ETF to invest in high-yield bonds issued by Canadian companies.
The growing appeal of high-yield bonds shouldn’t be surprising in an era when five-year Government of Canada bonds are paying just 2.5%. Investors are hungry for yield, and they appear to be willing to take more risk to get it. But are these bonds a good addition to a portfolio, or do their big payouts come with too much volatility?
What are high-yield bonds?
Before considering that question, let’s clarify what high-yield bonds are.