Top Picks 2018: Do Junk Bonds Make Sense in This Environment?
With interest rates expected to head higher in 2018, it’s assumed that fixed income would be a less than ideal place to be invested. Junk bonds, however, tend to behave more like stocks than bonds, suggests ETF expert David Dierking, editor of ETF Focus.
With interest rates expected to head higher in 2018, it’s assumed that fixed income would be a less than ideal place to be invested. Junk bonds, however, tend to behave more like stocks than bonds.
Their value tends to be judged more by their financial strength as opposed to the direction of interest rates. Junk bonds have done fairly well in 2017, but a strong economic environment coupled with the tailwinds of corporate tax reform could lead to further gains in 2018.
An interesting choice could be the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). This fund is filled with bonds that are currently rated as junk but were investment-grade when they were issued.
The Fallen Angel Bond ETF targets those names that could be in a position to rebound financially and regain their investment-grade status.
Download MoneyShow’s 35th Annual Top Picks Report: The 100 Best Stocks for 2018
The names in this portfolio, such as Transocean, Freeport-McMoRan and ArcelorMittal, could particularly benefit from the tax reform package that was recently passed.
A lower corporate tax rate could improve the balance sheet strength and credit quality of these companies. Not surprisingly, nearly half of the portfolio is invested in the beleaguered energy and materials sectors and offers a dividend yield of almost 5%.
David Dierking is founder and editor of ETF Focus.
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