Busted! Got Caught Looking at ETFs

After running my stock screen for the week, I did something that I rarely do—I started checking out some ETFs.

Generally, I’m not big on funds. A fund is a large collection of holdings that spreads out risks. On any day, some of these investments are going up, and some are going down. Reducing risk also reduces the potential rewards of just picking a few of the right stocks.

I like to pick my own stocks—most of the time.

At the right time, though, funds can be useful. One of those times is when I don’t want to deal with certain types of investments or market sectors. And that’s what spurred my latest hunt for potential ETFs.

I was asking myself what exposure I didn’t have in my portfolio from individual stocks. And more importantly, was there an ETF that would pay me income along the way.

My first thought was to dig into consumer discretionary. The sector has been struggling over the past few years and I just can’t pull the trigger on most individual stocks. Plus, with consumer sentiment dropping due to inflation fears, we could see a few of these companies disappear.

Unfortunately, many of the funds in this sector are paying higher yields by using an options strategy. That’s not what I was looking for.

My wish list also includes EV exposure, but more specifically, companies outside of the US. When I was in Costa Rica last month, I had multiple Uber drivers raving about their electric cars… and they were all brands not readily available here.

That led me back to the Amplify Lithium & Battery Technology ETF (BATT) which I’ve recommended before. My subscribers got out earlier this year for a nice 54% gain. The fund trades just about at NAV, which I like, and it offers exposure to brands like BYD Company (BYDDY). However, the dividend paid out keeps decreasing every year.

Fixed Income Without the Headache

I’ll admit it’s been years since I’ve bought a bond. The last few times I logged into my brokerage account to look for a specific issuance, I had a hard time finding it. In the broker’s defense, it was an obscure junk bond that had a juicy double-digit yield.

You can easily buy treasuries or high-rated corporate bonds with most brokers. But their perceived safety usually comes with low yields. When you start looking for high-yield bonds, you’ll be met with disclaimers that “high-yield bonds are subject to investment risks, including potential loss of principal.”

There’s also the fact that bonds typically have a face value of $1,000, and some brokers have higher minimums than that for a purchase. You might even pay commissions or fees to buy and sell. Plus, liquidity can be a lot lower than it is for stocks.

This is an example of when I would rather use a fund to do the work for me.

High-Yield Bond Funds On My Radar

When I do look at a fund, I want to check three things. First, I check its objective to make sure it’s what I want in my portfolio. Next, I’ll check the top holdings. These should fit into the fund’s objective and just make sense overall.

Finally, I want to know the expense ratio or the annual fee collected by the fund. This is the total operating expenses divided by the average assets under management. Again, this needs to make sense depending on the objective. A more active strategy should have a higher expense ratio, while a more passive one should be minimal.

Here are three high-yield bond funds that got my interest:

1. State Street SPDR Bloomberg High Yield Bond ETF (JNK)

    

   The objective is to track the Bloomberg High Yield Very Liquid Index. It does this using high-yield corporate bonds with above-average liquidity with a rebalance on the last business day of the month.

    

   None of its top holdings account for more than a 1% share of the portfolio and spreads out the risk. We can also see they all yield over 6.25% with maturity dates before 2032, which aligns with the fund’s objective

   
   

   

   
   

   Its expense ratio is 0.4%, which is reasonable for a low-maintenance strategy and well below my 1% limit. The fund pays monthly and currently yields 6.5%.

    

2. PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS)

    

   Its objective is to track the return of the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index. In other words, it tracks debt rated below investment grade with a duration of 5 years or less. A short maturity focus offsets interest rate sensitivity.

    

   The top holdings concern me a little bit, because I don’t like seeing cash on that list.

    

   

   
   

   At any time, PIMCO must be 80% invested in components of the Index it tracks. The currency forward—with a coupon of 0—is most likely a short-dated currency forward to bridge the time between receiving cash and deploying it into new positions. It keeps the fund “fully invested.”

    

   All portfolios are going to have cash flowing in and out, but I don’t like when it’s the biggest portfolio position. I want that money invested and working for us.

    

   Moving down the list, Cloud Software and Echostar bonds are also held in the State Street ETF above. The expense ratio is 0.56%, which is reasonable. HYS also pays out monthly, with a current yield of 7.1%.

    

3. iShares Broad USD High Yield Corporate Bond ETF (USHY)

    

   The fund seeks to track the investment results of a US dollar-denominated, high-yield corporate bonds index. It also claims its exposure is broader than any other ETF. And its expense ratio is the lowest I’ve seen at 0.08%.

    

   USHY also has its cash management at the top of its holdings list, but at just 1.1% compared to HSY’s 2.9%.

   
   

   

This is the “cheapest” of the three funds with shares trading at just $36.93. It pays monthly and currently yields 6.5%.

All three of these funds are great ways to access high-yield “junk” bonds without going through the hassle of picking and then trading your own. Plus, this is an example of when we want a portfolio of exposure in case one or two of the bonds end up being a complete dud.

For more income, now and in the future,

Kelly Green