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ETF Specialist

Why PIMCO's Junk-Bond ETF Is the Best of Its Kind

If you need yield, avoiding conventional junk-bond indexes is a wise move right now.


I dislike most junk-bond exchange-traded funds. With their coupons counted as ordinary income, they're the tax man's best friend. And their underlying holdings are much more illiquid than the typical ETF's, creating the potential for big premiums/discounts and heinous trading costs, much of it hidden to investors. But if you held a gun to my head and forced me to pick the best junk-bond ETF, I'd pick PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS). In truth, I rather like this fund.

Let's start with an historical observation. As Exhibit 1 indicates, short-duration junk bonds have done better than the broad junk-bond market, with lower volatility. The outperformance is even better after you adjust for the differences in duration, or sensitivity to interest rates. Decades of falling interest rates put the wind behind the longer-duration index. In fact, the junk-bond market only beat duration-matched Treasuries by about 1.7% annualized; short junk bonds beat duration-matched Treasuries by 4.3%.

  - source: Morningstar Analysts

Samuel Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.