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Margin of Safety Still Matters: High-Yield Bond ETFs Crater

March 12, 2020 By Jeremy Jones, CFA

For much of the last five years, junk bonds have outpaced short-term investment-grade bonds. Ultra-low interest rates, quantitative easing, and a central bank set on rescuing investors during every episode of market turbulence emboldened investors to reach for yield in high-yield bonds.

We advised against such a strategy. Risk must always be evaluated before return.

Turns out, easy money can’t cure coronavirus. The iShares High-Yield Bond index just gave up more than 5-years worth of return advantage over the Vanguard Short-term Investment Grade fund. It only took a couple of weeks for the losses to compound.

To make matters worse, investors who reached for yield in junk bonds are watching their bond portfolios melt-down just as the stock market is plunging to new lows.

High-yield bonds have a role to play in portfolios during periods of despair and revulsion (much closer to that today), but not without an adequate margin of safety.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #10 in CNBC's 2019 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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