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By Scott Burns | 09-25-2009 12:14 PM

Digging for High Yields in the Junk Heap

High-yield bond ETFs could pay off for investors with a high risk tolerance who think the worst of the credit crisis is behind us.

Scott Burns: Digging for high yields in the junk heap. Hi, I am Scott Burns, director of ETF analysis with Morningstar. Today, we are going to talk about investing in junk bonds using ETFs. Many individuals out there know that ETFs are great for sector investors or other niche type investing, but one of the fastest growing areas in the ETFs is actually the slicing and dicing in the fixed income space.

And no space in fixed income really lends itself more to the full benefits and powers of the ETF structure than junk bonds--primarily diversification, which ETFs bring and allow investors to own a broad basket of these highly risky securities. This means that should one of the bonds in the fund go bankrupt or go into trouble, you have the benefit of diversification across hundreds of holdings to help offset that loss.

So, although it doesn't help when you have trouble in the credit markets, even in junk bonds, it does help minimize some of the pain compared to if you just owned a single junk bond or several junk bonds.

Now, when we look at the high yield space in ETFs, there are two primary players. There is the iShares iBoxx High Yield Corporate Bond ETF with the ticker HYG and the SPDR Barclays Capital High Yield Bond, with the ticker JNK--very aptly named, we can think of that as short for junk.

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