Yield Is Underrated
But not in the way you think.
Last week, I found myself engaged in a somewhat complicated exercise to determine the risk levels of various bank-loan funds. (Bank-loan funds, sometimes called senior-loan or floating-rate funds, are a lower-quality bond-fund type; they're perhaps not quite as risky as junk-bond funds but definitely riskier than high-quality bond funds.) I wanted to replace one of the bank-loan exchange-traded funds in my model portfolios with another fund, preferably a lower-risk option given the current spot in the economic and credit cycle.
In an effort to identify the lower-risk offerings within this high-risk category, I went straight to portfolio statistics. I compared the various funds' credit-quality ratings relative to one another and the Morningstar Category, and I checked cash holdings to gauge the funds' liquidity. I also pored over the analyst reports to assess the presence of other risk factors that perhaps I was missing by looking at the portfolio itself. I was toggling from fund to fund, documenting the risk profiles of each of the contenders.
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