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Author: tmdeeply Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35248  
Subject: Investing in Corporate Bond ETFs Date: 4/24/2004 1:49 PM
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Hi guys,

I am thinking about investing in closed end ETFs for corporate bonds (e.g. HYV, LBC, PHY etc.). Now at current prices, these have yields around 10-11%. I understand that as interest rates rise, the market price for these ETFs would go down driving up yields. Even so, I expect that prices shouldn't go down too much as I think it would be unreleastic to have yields upwards of 12%-13% on investment grade securities (lets assume we won't run into a 1981 scenario in the next 5-7 years). Would appreciate if others can share their thoughts on this.

I am trying to make a cost-benefit assessment if it would be a good idea to buy them at this time.

Thanks,

tmdeeply

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10017 of 35248
Subject: Re: Investing in Corporate Bond ETFs Date: 4/24/2004 2:15 PM
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In most cases, tmdeeply, ETFs will pay fixed interest per share. That means that as interest rates increase, the NAV and share price will decrease to provide a competitive yield to new buyers.

Fixed income investments usually pay a relatively steady differential from the Treasury yield curve consistent with their maturity and bond rating. With increasing rates, higher yields are likely, but the shape of the curve and the differential can be moderated by supply and demand aspects in various segments.

The yields you mention are not consistent with "investment grade" securities. You are probably talking about high yield corporates, ie junk bond funds.

An article in Fridays WSJ noted that some closed end bond funds have been able to pay remarkably high yields by leveraging their investments. Ie borrowing money to buy additional bonds. They have been hard hit recently because of rising interest rates. The article noted that leverage works the otherway in the case of rising rates. This could be another factor in the case of the high yields as you mention.

Read the prospectus carefully.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10018 of 35248
Subject: Re: Investing in Corporate Bond ETFs Date: 4/24/2004 8:38 PM
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"I am thinking about investing in closed end ETFs for corporate bonds (e.g. HYV, LBC, PHY etc.). "

Well, of the three only HYV explicitly calls itself "high yield" (the standard eupemism for junk bonds); PHY calls itself "high income." But you aren't going to get those kinds of yields playing it safe. Vanguard's high yield fund, which sticks to the top tiers of junk, is yielding 6.9%. As Paul said, there may be leveraging factors at work with the closed-end funds that boost the yield beyond just holding the junkier junk, but those pose added risks as well.

As with all things, you get what you pay for.

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