Risk tolerance could rise after a strong market rally in July. As equity indices climbed, bond prices also rose, and July also saw a marked increase in flows for high-yield bond funds.
Yields rose for most of the year as the US Federal Reserve pushed rates higher in an effort to contain inflation. As market confidence returns, so do investors in high yield bond funds.
“After a rocky start to 2022, U.S. high-yield bond funds received about $6.8 billion in net money in July, according to data from Morningstar Direct,” said one. CNBC says the report. “While yields have recently fallen to 7.29% as of August 10, interest is still higher than the 4.42% received in early January, according to the ICE Bank of America US High Yield Index.
Nevertheless, investors should always understand the risk of high yield bonds. With market uncertainty lingering, especially with the possibility of a recession amid slowing growth due to rising rates, investors should exercise some caution with high yield bonds given the their higher default risk.
“It’s a shiny metal on the floor, but not all shiny metals are gold,” said certified financial planner Charles Sachs, chief investment officer at Kaufman Rossin Wealth in Miami.
Rather than opting for bonds, investors can opt for other income opportunities. One route is through dividend-paying stocks in an exchange-traded fund (ETFs) packaging using the Vanguard High Dividend Yield Index Fund ETFs Shares (VYM ).
As mentioned, dividends are an alternative route to high yield debt with ETFs like VYM. The fund uses an index investing approach designed to track the performance of FTSE The High Dividend Yield Index, composed of common stocks of companies that generally pay above-average dividends.
The advisor attempts to replicate the target index by investing all or substantially all of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund comes with a low expense ratio of 0.06%.
Another option is looking for global dividend income opportunities in the Vanguard International High Dividend Yield ETFs (VYMI ). The fund also boasts a profitable expense ratio of six basis points.
VYMI offers an all-in-one option, allowing investors to navigate international debt markets without having to sift through large amounts of financial data to find the best opportunities. Moreover, international investing has its own set of nuances, and VYMI can help take that guesswork out.
For more news, insights and strategy, visit the Fixed Income Channel.