Multi-Sector Bonds: A Yield Alternative

05/17/2016 9:00 am EST

Focus: FUNDS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Yields across the fixed income universe are low; in the market for US Treasury bonds, for example, one has to go out longer than 10 years to achieve even 2% and even the 30-year Treasury bond offers a current yield of only 2.66%, explains fund expert Mark Salzinger, editor The No-Load Fund Investor.

Federally tax free municipal bonds are not much better even on an after-tax basis, with even long-term investment-grade funds in the category yielding less than 2%.

Medium-grade corporates are barely a percentage point better than US Treasuries of similar maturity (and sometimes not even that much), which isn’t an attractive spread for that kind of credit quality.

For a conventional higher-yielding choice, consider multi-sector bond funds.

These funds invest in various corners of the fixed income universe, often balancing the duration risk of Treasuries/agency bonds, the credit risk of below-investment-grade corporate bonds (so-called junk), and the various risks of foreign (often emerging market) bonds.

So far this year, one of the best of the lot has been T. Rowe Price Global Multi-Sector Bond (PRSNX), which we include in various Price Best Buys models.

More diversified than even the typical multi-sector bond fund, PRSNX invests more than half its assets overseas and adds US floating rate loans to its mix, resulting in an overall risk slant toward credit and away from interest rate. The fund has produced a total return of 4.2% year to date, and it yields about 3.4%.

For a higher yield, consider the more conservative side of the US high-yield corporate market. In particular, consider Vanguard High-Yield Corporate Fund (VWEHX), which yields about 5.4% and achieved a total return of 5.0% during the first four months of this year.

Because its expense ratio (0.23% on low-minimum Investor shares) is so much lower than that of virtually every other high-yield bond fund, it can invest in higher-quality (and slightly lower yielding) bonds than its peers and still achieve the same (or even higher) yield.

Though energy bonds account for a mid-teens percentage of the high-yield market, they combine for less than 9% of VWEHX. In fact, communications, consumer non-cyclical, technology and capital goods all account for greater percentages of fund assets than does the energy sector.

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By Mark Salzinger, Editor The No-Load Fund Investor.

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