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ETF Specialist

Under the Hood of SPDR Barclays High Yield Bond ETF

It offers an attractive yield but is heavily concentrated in the industrials sector.

Mentioned: , , , ,

For strategic, long-term exposure to U.S. high-yield bonds, investors may consider  SPDR Barclays High Yield Bond ETF (JNK) as a small core holding. The fund can also serve as a tactical investment for the satellite portion of a diversified portfolio. Investors should bear in mind that high-yield bonds are one of the most volatile sectors of the fixed-income market.

Long-term-minded investors looking to JNK as a strategic position are likely to find the diversification benefits of high-yield bonds attractive. High-yield bonds tend to be negatively correlated (or uncorrelated) with government and aggregate bond portfolios, which often make up the bulk of most investors' fixed-income exposure. Moreover, high-yield bonds are poised to hold up relatively well in the event of rising interest rates and inflation. While rising rates and inflation tend to be the enemy of typical fixed-income securities, the high-yield bond asset class tends to outperform its fixed-income peers during such periods thanks to its stocklike returns and heavier dependence on business fundamentals. Consider that over the past 10 years, U.S. high-yield bonds have shown positive correlation (74%) with the S&P 500, while the Barclays U.S. Aggregate Bond Index has been relatively uncorrelated (26%) over the same period. Remember, interest rates will typically rise when the economy is in good shape and businesses are performing well. High-yield bonds tend to perform well when issuers' fundamentals are strong or improving (and vice versa).

John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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