If you're concerned that you are buying junk when you put your money into high-yielding corporate bonds, it may be time to rethink that old theory. According to Moody's Investor Service, the trailing 12-month global default rate on speculative-grade corporate bonds fell to 1.7% in the fourth quarter of 2011 from 3.2% a year ago. (For related reading, see Corporate Bonds: An Introduction To Credit Risk.) Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

One year ago, the default rate was 3.4% in the U.S. Even with fears looming over the economy, the default rate is at a very low level, historically. Moody's expects that the default rate will climb to 2.9% by the end of 2012, but again, still a very low figure.

Low-Yield Environment
What makes the junk bond market so attractive is that it offers yields that are much higher than government or investment-grade corporate bonds. The yield on the 10-year note offered by the U.S. Treasury stands at around 1.90%, well below the approximately 7% that you get with an average junk bond.

Advertisement - Article continues below.

Junk-Bond ETFs
The largest high-yield ETF based on size is the iShares iBoxx High Yield Corporate Bond ETF (ARCA:HYG), which has over $11 billion in net assets. The ETF is composed of over 450 individual bonds with a heavy concentration in consumer services, financials and telecommunications. The largest holding makes up less than 1% of the total allocation. The average maturity is around 5.2 years and it charges a 0.50% expense ratio. In 2011, the ETF was down approximately 1%, currently yielding around 7.6%.

The SPDR Barclays Capital High Yield Bond ETF (ARCA:JNK) has over $9 billion in net assets and charges a slightly lower expense ratio (0.40%). There are 217 bonds in the ETF, with a heavy concentration on the industrial sector. The average maturity is about 6.8 years and the yield is slightly higher at around 7.7%. In 2011, JNK lost 3.56%, not including the dividends throughout the year.

The PowerShares Fundamental High Yield Corporate Bond ETF (ARCA:PHB) has some differences from the first two ETFs. The approximate $695 million ETF has an average maturity of about 6.1, which is in-line with the first two, but its yield is only around 6%. That being said, PHB was up about 1.2% last year before considering dividends. The makeup is similar to HYG in that it has 215 holdings with a heavy concentration in the consumer. The expense ratio is 0.50%. (To learn more, read An Introduction To Corporate Bond ETFs.)


Target Date ETFs
Last year, Guggenheim introduced four ETFs that have a defined maturity. The maturities range from 2012 to 2015. The Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (ARCA:BSJF) plans to terminate at the end of 2015 and distribute the cash to shareholders at that time. The expense ratio is 0.42% and the average maturity is 4.07 years. The ETF is more concentrated with only 74 holdings and it has a heavy concentration in the financials at around 23%. The current yield is around 5.5% and the fund has $42 million in assets.

The Bottom Line
Most investors will be attracted to one of the two large ETFs, either HYG or JNK. Both have similar returns and are heavily diversified funds; they also pay the higher dividend of the four choices. That being said, the BulletShares are a good option for investors that either have or want a set maturity date. It all depends on your goals and risk levels. All four should do well in 2012, as money flows into the sector and investors search for high yields in a low-yield environment. (For additional reading, see The Importance Of Diversification.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.