Hungry for income? Consider high-yield bonds

Top-rated funds actively manage their credit risks.

Craig Sebastiano 28 June, 2016 | 5:00PM
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For income-starved fund investors, an alternative source of returns -- at least for a portion of their fixed-income holdings -- is the High Yield Fixed Income category. Though these funds may hold investment-grade issues, they must invest more than 25% of their portfolios in high-yield securities in order to belong to the category.

Since high-yield funds hold securities with lower credit ratings, or that are unrated, they are subject to higher default risk. Nor are there any assurances that investors, over any given time period, will be rewarded for assuming these risks. For example, in the three years ended May 31, the median annualized return in the High Yield Fixed Income category was 2.4%, compared with 3% and 4.2% respectively for Canadian Fixed Income and Global Fixed Income.

However, for investors who are willing to tolerate higher risk in return for potentially higher returns, high-yield funds can play a role. Here are three funds that Morningstar's manager research team have analysed, including the only two that have received better than Neutral ratings.

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About Author

Craig Sebastiano

Craig Sebastiano  Craig Sebastiano is a freelance writer based in Toronto. He writes about topics related to personal finance, investing, retirement and real estate. He has worked at BNN, Benefits Canada and StockHouse.

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