Today I decided to do some research to find a good high yield bond fund. One of the first things I do when considering an investment is to look at a long term chart. While bond fund prices have had a strong bounce off the bottom over the past few months a chart reveals that they are still significantly off the highs they reached several years ago. Many yield in the 8 to 11% range which is enticing enough for me to wait out any return to the previous lows reached in December which could certainly happen in this floundering economy.
I have been considering high yield bonds since December but I was uncertain the effect that GM’s pending bankruptcy would have on them if it came to fruition. Then last week I found out that the effect would be nothing. This led me to believe that this market is pretty strong.
One of my favorite high yield bond funds is the Vanguard Corporate High Yield Fund symbol VWEHX. I like it because it tends to have slightly better quality bonds than many of the high yield bond funds. It also has very low expenses. I have invested in it several times over the years so it tends to be somewhat comfortable.
Keep in mind that there is a reason for the high yield and that reason is risk. The bonds that are held in high yield bond funds are of low quality and have a higher chance of default than a regular bond fund that is not designated as high yield. These funds are also referred to as junk bond funds and for a good reason.
Now are you wondering why I would even consider a junk bond fund? The upside is that being in a fund provides a lot of diversification since you own a group of many many bonds not just a few. If a company in the fund should default the downside would be much less dramatic than if you owned only a few. Additionally prices are still in the low end of the long term range. This in addition to the high yield makes me think that I could earn some good income while I wait it out. Finally investments that provide the potential for both income and capital appreciation are always appealing to me.