Is Risk-Taking Making A Comeback?
Last week I told you about an upcoming PowerShares Exchange Traded Fund (ETF) called the Alt-A Non-Agency RMBS Opportunity Fund. It will buy Alt-A loans, which are lower or alternative documentation loans made to borrowers whose risk profile falls between prime and subprime.
Today, Van Eck Global launched a Market Vectors High-Yield Municipal Bond Index (HYD), the first ETF to focus on the high-yield muni bond market.
There are other ETFs that access munis of course, but not the high-yield muni market. The key is low expenses: at 0.35 percent, it is significantly lower than most muni mutual funds.
Is it risky?
Munis of all stripes--including high-yield munis--have seen big price drops in the last year, but Van Eck, like the PowerShares people, smell opportunity: "their current prices relative to historical default rates suggest considerable value."
Also bear in mind that a high-yield fund is riskier than a plain vanilla muni fund: it is pegged to an index that is 25 percent weighted in investment grade triple-B bonds, and 75 percent in below-investment grade bonds.
1) With a yield of 9.5 percent, versus an average yield of 4 percent for the muni market as a whole, you are compensated for that risk to a great extent.
2) The default rates for the high yield muni bond market are significantly lower than the default rate for equivalent-rated corporate bonds (4.29 percent default rate for speculative grade munis compared to 31.37 percent default rate for speculative grade corporates).
Of course, the fund is of interest for investors looking to augment their tax-free income.
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