Make Money in High-Yielding Junk Bonds the Easy Way
May 10th 2012 1:04PM
Updated May 10th 2012 4:24PM
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you believe that there's good money to be made in junk bonds, the SPDR Barclays Capital High Yield Bond ETF (NYS: JNK) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The junk bond ETF's expense ratio -- its annual fee -- is a relatively low 0.40%.
This ETF has performed reasonably well, ranked top in its category over the past three years by Morningstar. But it's also rather young, with just a few years on the books. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Lots of promising companies offer tempting bonds. A peek inside this ETF reveals some examples, many of which have seen their shares perform well lately. There's power generator Calpine (NYS: CPN) , for instance, up about 11% over the past year. Some worry about its near-term prospects, though, as low natural-gas prices could force it to cut power prices, hurting its bottom line. The Calpine bond the ETF owns currently yields 7.11% to its 2021 maturity.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Ford (NYS: F) , for example, shed 29% over the past year, but its turnaround has been so strong that its debt rating has been upgraded by Fitch. That means it will be able to borrow money more inexpensively in the future. The company has seen strong sales at home, and is focusing more intently on small cars abroad, especially in India, while investing heavily in China. The company's cash now exceeds its debt, and it has been grabbing market share from competitors. The ETF's Ford bond has a 5.88% coupon rate and matures in 2021.
Wireless broadband provider Clearwire (NAS: CLWR) plunged a whopping 73% over the past year, partly on news that Verizon would be selling some of its spectrum, thus making Clearwire's spectrum assets less valuable. That's a big deal to a company with more than $4 billion in debt. The company sports significant strengths as well as weaknesses, leaving some investors unconvinced. A bailout from Sprint Nextel (NYS: S) , for example, will help it develop a 4G TD-LTE network, but it has been losing customers and posting net losses lately. The Clearwire bond the ETF owns currently yields 9.12% to its 2015 maturity.
Sprint itself has had a tough year, with its stock down 56%. Recently reporting rising revenue and large, growing losses, the company faces challenges as it drops some old networks, rolls out its new 4G LTE one, and spends billions subsidizing iPhone accounts. The Sprint bond the ETF owns has a 9% coupon rate and a 2018 maturity.
The big picture
Junk bonds are risky, but they offer big yields, A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier. This ETF, for example, sports a 12-month yield of 7.3%.
If you're looking for ways to profit from the booming demand for smartphones but are nervous about Sprint Nextel and Clearwire, check out our special free report, "The Next Trillion Dollar Revolution" -- which names names.
At the time this article was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Ford and Verizon Communications, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Ford . The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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