News and analysis from Standard & Poor's MarketScope Advisor
With the ups and downs of the stock market over the past two years enough to give even seasoned investors indigestion, the lure of a monthly interest check is almost irresistible. Record low interest rates, however, mean that check isn't very much for owners of investment grade bond funds, so more and more people are turning to high-yield "junk" bond funds in search of decent returns.
High-yield bonds–those with a credit rating of BB+ or lower–have rallied substantially in early 2010 amid the combined effects of investors searching for yield and expectations that U.S. economic growth will accelerate in the future. Standard & Poor's economists are looking for U.S. gross domestic product growth of 3.0% in 2010, and 2.9% in 2011, which would improve the profitability of less credit-worthy borrowers and make it easier for them to repay loans.
There are roughly 100 high-yield bond funds available to U.S. investors, both load and no load, with annual expense ratios that range from 0.15% to more than 2.7%. In addition to U.S. high-yield corporate bonds, several funds also own equities and foreign bonds in their portfolio. These funds have delivered average annual returns over the past five years varying from 11% to negative 22%.
Among these funds, we screened for those that had Standard & Poor's 5 star rank, $20 million or more in assets, no upfront sales load, and minimum initial investments of $20,000 or less. We then sorted through the dozen funds that meet those criteria, looking for funds that combined low expense ratios, consistently strong performance over the past one-, three-, and five-year time periods, and high distribution payments, and chose three funds with different combinations of attractive features.
