Tags: Morningstar | invest | junk | bonds

Morningstar: How to Invest Safely in Junk Bonds

By    |   Thursday, 01 Mar 2012 08:02 AM

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.

Editor's Note:The IRS’ Worst Nightmare — How to Pay Zero Taxes

“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).

Vanguard High-Yield Corporate has produced an annualized total return of 19.5 percent over the past three years, while Janus High-Yield has generated a return of 20 percent, and Metropolitan West High Yield Bond has offered a return of 20.6 percent during the period.

Financial market experts diverge in their view of junk bonds. While some, like Morningstar, recommend them, others don’t, saying their performance correlates closely to stocks, but with greater risk. If you do invest, obviously don’t bet the house.

Editor's Note:The IRS’ Worst Nightmare — How to Pay Zero Taxes

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