Regardless of the state of the financial markets, investors are constantly on the lookout for income-generating assets. One group of instruments that may warrant a position in your portfolio is corporate bonds, which are issued by corporations as debt and typically paid back from earnings of future operations. Generally speaking, corporate bonds are regarded as higher risk than government bonds, but diversifying the risk by investing in a basket of corporate bonds could be a quick win for those looking to increase their portfolio’s yield. In the article below, we’ll take a look at several options that could be worth a closer look in 2017.
iShares iBoxx High Yield Corporate Bond Fund
The most heavily-traded corporate bond fund in the U.S. is the iShares iBoxx High Yield Corporate Bond Fund (HYG). This fund is commonly used by retail investors for gaining exposure to a broad range of U.S. high-yield corporate bonds, and it has a twelve-month trailing yield of 5.24%. Taking a look at the chart below, you can see that the fund is trading within an established uptrend and has consistently recovered from minor pullbacks since early 2016. This chart is an excellent example of how the price trades around key levels of support and resistance. For example, the proximity of the 200-day moving average provides a technical area of support in case of a major selloff such as the drop following the U.S. election in November. Active traders would look to open a position in HYG as close to the 200-day moving average as possible to maximize the risk-to-reward of the trade. (For more, see: Beginner's Guide To Trading Fixed Income).
Vanguard Intermediate-Term Corporate Bond ETF
Another favorite corporate bond fund amongst active traders is the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). In case you aren’t familiar, the fund’s managers seek to provide a moderate level of income by investing in investment-grade corporate bonds with a dollar-weighted average maturity of five to ten years. The fund is comprised of 1801 bonds and has total net assets of $11.4 billion. Taking a look at the five-year weekly chart, you can see that the fund is trading with a defined uptrend. The ascending trendline has provided a consistent level of support over the years, and many active traders have used it as a guide for placing their buy and stop-loss orders. From a technical analysis perspective, the recent dip and subsequent recovery of the RSI indicator could be used as confirmation of a continued move higher just like it did back in late 2013. (For more, see: How to Invest in Corporate Bonds).
SPDR Barclays Short Term Corporate Bond ETF
The last corporate bond fund that we’ll take a look at in this article is the SPDR Barclays Short Term Corporate Bond ETF (SCPB), which is comprised of bonds with the remaining maturity of great than or equal to one year and less than three years. Like VCIT above, the fund’s managers look to invest in investment-grade, which consequentially leads to similar chart pattern. Like the case above, active traders will use the dotted trendline as a guide for placing their orders. Most traders will likely be keeping a close eye on the MACD indicator because a cross over its signal line will likely trigger a move to a fresh 52-week high. (For more, see: Corporate Bonds: An Introduction To Credit Risk).
The Bottom Line
When it comes to hunting for yield, many active traders stop their search at dividend-paying stocks. Based on the analysis shown above, it seems that corporate bonds could be worth a closer look in 2017. Specifically, by taking a look at the weekly charts, strong uptrends lay out clearly-defined levels for placing both buy and stop orders. (For more, see: Forget Dividends and Buy Corporate Bonds).