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.