5 ETFs Defying Market Swoon While Yielding 7% Or More

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The stock market sell-off that started in September has spared very few stocks or ETFs . But there are a few defying the swoon that are also paying juicy dividends, rewarding investors to sit on their hands.

Here's an overview of five ETFs yielding 7% or more that are also trading above their 200-day moving averages, unlike some of the major indexes.

1.Peritus High Yield ETF ( HYLD )

• 12-month yield: 8.37%.

• Annual expenses: 1.35%.

HYLD has returned 11.85% year to date vs. 4.31% for the benchmark Barclays U.S. Aggregate Bond index, putting it No. 1 in its Morningstar category.

Actively managed by Peritus I Asset Management, the fund buys noninvestment grade bonds -- commonly referred to as junk bonds -- that are trading below face value. This allows for potential price appreciation on top of the yield income.

Peritus says it shuns credit ratings from the rating agencies in favor of its own research. It prefers buying bonds issued by companies that offer an "essential product or service," generate free cash flow and have hard assets not priced into the bonds.

2 .UBS E-TRACS Wells Fargo Business Development Company ETN ( BDCS )

• 12-month yield: 7.08%.

• Annual expenses: 0.85%.

BDCS has surged 27.30% year to date vs. 12.57% for the S&P 500. This exchange traded note tracks an index of 28 companies engaged in lending to small and midsized companies at high interest rates while also buying stakes in the companies. They may also get involved in managing the company.

The top holdings in Wells Fargo Business Development Company Index and their respective index weightings:

1.Ares Capital ( ARCC ) 10.16%.

2.Prospect Capital ( PSEC ) 9.86%.

3.American Capital ( ACAS ) 8.74%.

4.Apollo Investment (AINV) 8.07%.

5.Fifth Street Finance (FSC) 6.68%.

6.Solar Capital (SLRC) 6.60%.

7.BlackRock Kelso Capital (BKCC) 5.52%.

8.PennantPark Investment (PNNT) 4.57%.

9.Main Street Capital (MAIN) 4.33%.

10.Triangle Capital (TCAP) 3.97%.

As an exchange traded note, BDCS is an unsecured debt obligation issued by UBS. Its value may be affected by changes in UBS' credit worthiness. If UBS defaults, investors could lose all of their money.

3. UBS E-TRACS 2X Wells Fargo Business Development Company ETN (BDCL)

• 12-month yield: 13.22%.

• Annual expenses: 0.85%.

BDCL doubles the daily price movements and pays twice the yield of BDCS.

4.SPDR Barclays Capital High Yield Bond (JNK)

• 12-month yield: 6.89%.

• Annual expenses: 0.40%.

JNK has returned 10.45% year to date. High-yield bonds make higher interest payments because the issuing companies have low credit quality or they're highly leveraged or indebted, which increases the risk of default or bankruptcy. But an ETF with 279 holdings minimizes the impact of defaults.

The default rate in 2009 was about 13% and fell to 3.3% by the end of 2010. On a trailing 12-month basis the current high-yield default rate was only 2.2% as of July 2012, according to Morningstar.

"Disruptions in the bond markets have caused this fund to experience significant swings in the premium and discounts to its net asset value (NAV)," Timothy Strauts, an analyst at Morningstar wrote. "While we believe that the problems actually lie in the markets of the underlying securities, investors should be aware of the premium or discount to NAV before purchasing this fund and be prepared to handle the gyrations."

JNK's correction during the recent sell-off has been very mild compared with the market. It's now trading only 1% below its 52-week high, while the market has fallen 6% off its multiyear peak.

Investors have piled into bonds in search of dividend income as interest rates hover at record lows. Should rates rise, bond prices will fall. Prices and yields move in opposite directions.

A major risk is that in bear markets, high-yield bonds can collapse just as badly as stocks. High-yield bond prices and spreads fluctuate with the market's expectations of high-yield issuers defaulting.

5. iShares iBoxx $ High Yield Corporate Bond (HYG)

• 12-month yield: 6.78%.

• Annual expenses: 0.50%.

HYG holds an index of junk bonds just like JNK. Its portfolio is nearly three times bigger with more than 600 bonds.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: ACAS , ARCC , BDCS , HYLD , PSEC

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