Low yields on fixed-income investments have investors scrambling for income. High yield bond funds are a natural alternative, but which funds should you consider to balance higher yields and risks? We asked several leading advisers for their suggestions.
Helen Huntley, Holifield Huntley Financial Advisers, St. Petersburg, Fla.
I like Metropolitan West High Yield Fund (MWHYX) for the consistency with which it has out-performed most of its peers in both good and bad markets.
The fund takes a flexible approach, using both a top-down approach based on interest rates and economic conditions and bottom-up analysis based on fundamentals of specific issues.
Recently the fund has become more defensive, favoring sectors such as utilities and energy. Net expenses are capped at 0.80 percent, below-average for the category, but there’s also a 0.25 percent 12(b)-1 fee.
Even with that cost, the fund’s performance compares favorably to that of a low-cost offering like Vanguard High Yield Corporate (VWEHX), which has an expense ratio of 0.28 percent. It’s also a plus that
MWHYX is available on many no-load, no-transaction-fee platforms. Minimum investment is $5,000. Annual turnover is 40 percent and 12-month yield is 8.16 percent.
Through June, the trailing three-year average annual return is 9.92 percent, compared to 5.47 percent for the category. That reflects the fact that the fund lost less during 2008 and gained more in 2009.
Bobbie D. Munroe, CFP, Fraser Financial, Atlanta
We use Vanguard High Yield Corporate Fund (VWEHX). It has average risk and return with low expenses (.28 percent) and provides good exposure to this asset class.
Additionally just under 14 percent of the holdings are in foreign corporations, a feature we like. All in all, we feel like this is one where we can for the most part “set it and forget it.”
When I am working with smaller portfolios (perhaps $100K or under) we stick with just a couple of funds or ETFs. But over that amount, I do diversify the bond holdings just as I diversify the equities. In every case, high yield is a player.
But for my more conservative investors, I will limit high yield to about 10 percent of the fixed income holdings (for a 50/50 portfolio that would be 5 percent). For moderate or aggressive investors that may move up to as much as 20 percent of the fixed income holdings (for a portfolio that is 30 precent fixed-income this would be 6 percent).
Penny Marlin, CFP, Marlin Financial, Delray Beach, Fla.