High Yield Funds: Black Sheep and Fallen Angels

12/01/2017 5:00 am EST


Brett Owens

Chief Investment Strategist, BNK Invest, Inc.

Here are two dividend funds with bulletproof yields up to 9.3%; their payouts are high because their stock prices are low as a result of being underfollowed, explains Brett Owens, editor of Contrarian Outlook.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) has a couple of advantages that make it worth consideration. For one, credit quality. The term “fallen angel” refers to the fact that these bonds were initially issued as investment-grade, but have since “fallen” to junk status.

While that sounds highly risky, in reality, ANGL’s portfolio is safer on the whole. More than three-quarters of this ETF’s holdings are rated BB — the highest classification of junk.

Meanwhile, the fund yield close to 5%. We caution that ANGL compensates with longer-maturity bonds, so it can be more sensitive to interest-rate hikes. Still, since ANGL’s inception, this has been a winning formula that has seen it trounce its better-known competitors.

You’ve probably not heard of the Pimco Corporate & Income Opportunity Fund (PTY) because it’s a closed-end fund (CEF), and despite their many virtues, CEFs are the black sheep of Wall Street’s fund world.


In short, a closed-end fund is like an exchange-traded fund in that it too trades on an exchange, but it has a limited number of units, and thus tends to trade very tightly around its net asset value, meaning at times funds can trade at discounts or premiums to their collective holdings.

They’re typically actively managed, which means high fees, which is an immediate turnoff in today’s index-ETF-crazed market — but because they can use leverage to juice dividends and returns, good CEF management can more than make up for their higher costs.

Pimco’s Corporate & Income Opportunity Fund is a bond fund that invests in a wide variety of debt, from mortgage-linked bonds to high-yield credit to even emerging-market and municipal bonds.

It features a nice maturity spread that’s mostly concentrated on the short-term –bonds of 1-3 years in maturity are the biggest piece of the pie, at 31% — and you even get international diversification, with about 20% of the fund split among the UK, Brazil, Russia and Luxembourg.

Additional leverage of more than 40% helps power a yield well north of 9%. That’s the fuel behind a five-year return that is roughly triple that of standard high-yield funds and more than seven times the broad bond benchmark!

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