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ETF Specialist

Junk Bonds: Go Active, or Don't Go at All

With a few exceptions, it's a terrible mistake to own a passive fund that tracks an illiquid market, writes Morningstar’s Sam Lee.

The way most investors think about high-yield bonds goes something like this: I'm retired and want to earn a steady stream of income while preserving principal. Because Treasury yields are so low, I'll own high-yield bonds.

This way of thinking about junk bonds is all wrong. Junk bonds behave like a mixture of equities and Treasuries, which is why they don't provide much of a diversification benefit when added to a conventional stock-bond portfolio. In fact, junk bonds occasionally experience sharp losses because of their greater illiquidity, worsening maximum drawdowns.

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