While ETFs continue to be the hottest investment tool, much to the chagrin of mutual funds, when it comes to the high yield arena, they are still a worthy competitor as ETF Trends submits in “High-Yield ETFs vs. High-Yield Mutual Funds:”
Exchange traded funds (ETFs) may have siphoned billions of investment money out of mutual funds in the past year, but when it comes to high-yield bonds, mutual funds are bringing a competitive game.
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Some of the benefits high-yield ETFs enjoy over similar mutual funds include:
* Similar to the ETF offerings, mutual funds that offer access to high-yield debt also track a select basket of low-grade corporate debt. However, the mutual fund offerings take an active approach while HYG and JNK are designed as passive products.
* Mutual funds rely on the know-how of their managers, which means higher expense ratios. Mutual fund expense ratios can exceed 1.0% and can incur short-term fees for shares held less than 90 days.
* The higher fees also mean that the mutual funds pay out lower yields.
* Mutual funds lack intraday liquidity, transparency and frequently have hefty investment minimums, as well.
When it comes down to total returns, leading high-yield mutual funds have recorded total returns of up to 20% in the past two years, whereas JNK and HYG have provided 12.8% and 11.1%, respectively.
Still, HYG and JNK are better for short-term trades because of their transparency, ability to trade throughout the day and lack of short-term trading fees. Mutual funds may be the better choice for long-term investing due to their total return outperformance.
To be clear, this is not a matter of pitting mutual funds against ETFs, but simply a matter of selecting the tool that’s most appropriate for you. Due to the ever present market volatility, my preference for generating income is ETFs, especially after the market run of the past year. While more upside potential still exists, at these levels, the risk of a correction has increased quite a bit.
Keep in mind that high-yielding ETFs and mutual funds will follow the general direction of the market. Take a look at this 2-year chart showing JNK and HYG compared to SPY (S&P; 500):
As you can see, during the meltdown of 2008, JNK and HYG did better than SPY, but holding on to these and seeing your principal deteriorate by some 40% will not give you the warm fuzzies, despite a 10% yield.
In my view, income funds/ETFs need to be treated just like equity funds/ETFs in that their trends need to be tracked, and a sell stop has to be used in the same fashion to protect your downside risk.
Disclosure: We have holdings in JNK