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Pastimes : The Justa and Lars Honors Bob Brinker Investment Club Thread
VTI 335.03-2.0%Jan 20 4:00 PM EST
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To: marc ultra who wrote (7020)4/4/2012 1:16:15 PM
From: gronieel2  Read Replies (1) of 10065
 
Speaking of junk bonds...here's a new short term junk bond ETF

State Street Adds Short Term Junk Bond ETF

by Michael Johnston on March 17, 2012

State Street has made another addition to its fixed income ETF lineup, recently rolling out the SPDR Barclays Capital Short Term HighYield Bond ETF ( SJNK). The new fund will target junk bonds that have less than five years remaining to maturity, thereby delivering a unique combination of low interest rate risk with significant credit risk. The new ETF is linked to a Barclays index comprised of about 350 bonds rated below investment grade. According to the SJNK fact sheet, the underlying index has an average maturity of about 3.3 years and a weighted average coupon of about 8.4%. The yield to worst on the index is just under 7% [see Fixed Income ETF Center].

Bonds deliver yields to compensate investors for two sources of risk: interest rate risk and credit risk. The former is generally determined by the time until maturity; longer-term bonds are more sensitive to changes in interest rates, and therefore have more interest rate risk. The latter relates to the likelihood of a default by the issuer; high quality companies with strong cash flows are unlikely to default on obligations, while companies with less stable financials may be a higher credit risk [see High Yield ETFdb Portfolio ]. So SJNK can be thought of as a way to generate material returns by maximizing one source of risk (credit) while minimizing another (interest rate). In that sense, SJNK is at the opposite end of the spectrum of ETFs such as TLT, which focus on long-term government debt [see Bond ETFs For Every Objective].

SJNK features an average time to maturity that is about half that of the broad-based JNK, a popular tool for achieving exposure to the junk bond market. The average coupons for the two portfolios are generally similar:

etfdb.com
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