Crossover Bonds: The Sweet Spot

09/27/2016 9:00 am EST

Focus: FUNDS

On the credit ratings scale a sweet spot exists where corporate bond yields are juicy but risk is moderate. That’s the point where corporates straddle the fence between investment grade and high yield, explains Tim Begany in Investing Daily's Personal Finance.

A portfolio of these “crossover” bonds can yield north of 4%, nearly twice the yield of the Barclays U.S. Aggregate Bond Index, a popular proxy for the broad fixed-income market.

Such a crossover portfolio also sits in a sweet spot for risk. It fluctuates less than the typical high-yield bond fund. And with a crossover portfolio you can expect total returns to be better, though a high-yield bond fund yields more.

You can invest in crossovers through SPDR BofA Merrill Lynch Crossover Corporate Bond (CJNK), an ETF launched in 2012. It’s still relatively unknown, with assets of only $37 million, but it yields 4.2% and is compiling a superb track record.

The fund rose an annualized 5.6% the past three years, compared with returns of 4.1% for the Barclays bond market index and 3% for the high-yield category.

In the world of fixed income, where prices move at a snail’s pace compared to the stock market, that’s exceptional outperformance.

Rather than trying to buy the 4,400 fixed-income securities in its benchmark, CJNK seeks a representative sample owning roughly 700 index components.

Despite its riskier fare, the fund averages a relatively safe and sound BBB credit rating, compared with the much weaker B rating of most high-yield corporate bond funds.

Besides offering better total returns, the fund is 16% less volatile than the typical high-yield exchange-traded fund.

CJNK’s 0.3% expense ratio is cheap, especially compared with most other fixed-income mutual funds.

Also, CJNK is unlikely to trigger much in the way of capital gains taxes, as only around 20% of holdings are replaced annually. The fund has made no capital gains distributions in the four years since inception.

Portfolio turnover is so low because buying and selling only occurs monthly as necessary to track the BofA Merrill Lynch crossover index. This buy-and-hold approach makes CJNK ideal for taxable accounts.

Subscribe to Investing Daily's Personal Finance here…

By Tim Begany, Editor of Investing Daily's Personal Finance

Related Articles on FUNDS

Keyword Image
Is a Bottom Forming for MLPs?
11/27/2017 5:00 am EST

I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...

Keyword Image
Takeover at Oppenheimer?
11/15/2017 3:58 am EST

On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...