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What if I still want to add high-yield bonds to my portfolio?

November 7, 2011 - 0 comments

Although high-yielding bonds are expected to have a higher return, relative to high-quality bonds, the addition of them to a portfolio creates more equity-like risk. If you decide to include them in your portfolio, consider carving a portion of the allocation out of the equities in your portfolio. In Larry Swedroe’s book, The Only Guide You’ll Ever Need for the Right Financial Plan, the rule of thumb he suggests for the percentage of your high-yield bonds to allocate to equities is given below:

  • 20% for BB rated bonds
  • 30% for B rated bonds
  • 50% for CCC rated bonds

As an example, consider a Canadian investor who would like to include an allocation of 10% of his portfolio to either the iShares U.S. High Yield Bond Index Fund (CAD-Hedged) (XHY) or Claymore Advantaged High-Yield Bond ETF (C$ Hedged) (CHB) - his portfolio is currently comprised of the following securities:

  • 60% iShares S&P/TSX 60 Index Fund (XIU)
  • 40% iShares DEX Universe Bond Index (XBB)

 

Using the most current credit quality ratings available on the company’s websites, this method would entail allocating approximately 30% of either high-yield bond ETF to the equity portion of the portfolio, and 70% to the fixed income portion.  In other words, the investor’s new allocation would look something like this:

  • 57% iShares S&P/TSX 60 Index Fund (XIU)
  • 10% iShares U.S. High Yield Bond Index Fund (CAD-Hedged) (XHY) or Claymore Advantaged High-Yield Bond ETF (C$ Hedged) (CHB)
  • 33% iShares DEX Universe Bond Index (XBB)

Sources: BlackRock Canada, Claymore Investments, The Only Guide You’ll Ever Need for the Right Financial Plan by Larry Swedroe

 

By: Justin Bender with 0 comments.
Filed under: Portfolio Management
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