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How do I Choose the Best High-Yield Bond ETF?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 06 September 2016
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Choosing the best high-yield bond ETF involves consideration of risk and volatility, analysis of technical aspects like fees and projected yields, and the process of matching a specific ETF with a concrete investing strategy. High yield bond exchange traded funds or ETFs have advantages, for example, in their relative liquidity and “in and out trade” capacity through intra-day trading and tracking. In the hunt for good high yield bond ETFs, though, investors should be aware that a high-yield bond fund includes some specific risks for a portfolio.

Don’t ignore the risk and volatility associated with parts of the bond market when trying to choose the best high-yield bond ETF. Some experts identify a lack of “bargain equities” as a reason why investors flock to the bond market. Without some solid reasoning, this kind of investor activity can be dangerous for those who don’t fully understand what they are getting into. For example, some of the pros point to default risk in junk bonds where a high-yield bond fund can suddenly leave an investor with unchecked risks.

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One way to deal with volatility in the bond market is through an “index ETF” that diversifies within itself as a single financial product. More diversified bond ETFs will often provide better hedging against some kinds of volatility. Another way that investors can maximize their potential for success in a high-yield bond ETF choice is to realize that the coin has two sides: along with classically long-position ETFs and funds, investors can choose a high-yield bond ETF that effectively “shorts” bond markets.

Investors should also look at all fees, commissions and costs associated with a high-yield bond ETF. This includes “management expenses” or an “expense ratio,” one time fees, and annual costs. Low brokerage fees often work to the advantage of the investor. A good tax structure and strategy also limits how much of the yield on a particular high-yield bond ETF gets eaten away in the form of surrendered profits.

Like so many other financial products, high-yield bond ETFs can seem excessively complicated. A beginning investor has the best chance of picking a good product by actually looking into the prospectus or summary of a fund to see what is actually inside. As some traders and even financial institutions are smarting from being burned by inadequate regulation of ratings agencies, it becomes even more important not to take any fund at face value, but to personally inspect the “guts” of a fund thoroughly, to get an intuitive idea of whether the fund is right for your portfolio. Doing the research on funds can be tough, but what it boils down to is having a detailed knowledge of all of your holdings, allowing you to pick the best funds, equities, securities, and products for long term gains.

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