Blue chips aren't known for cranking out big market-beating
gains. But that's exactly what has happened in the first nine
months of 2012, with the group surging higher as investors fled
volatility and slow economic growth in favor ofyield and
But these big gains are now proving to carry unintended
consequences. After many leading blue chips traded well into
all-time highs and unusually high valuations in the past six
months, all of a sudden these bastions of safety aren't looking so
for example. The company's stable revenue growth anddividend yield
of 2.5% drove huge capital inflows in 2012, liftingshares to a new
all-time high and an unusually lofty valuation. But during the
weakmarket of the past month, Wal-Mart shares have fallen sharply,
down 11% against the S&P 500's 7% decline. The story looks much
the same for other leading blue chips, with
Intel Corp. (Nasdaq: INTC)
Caterpillar Inc. (
down 11% and
International Business Machines (
down 11% in the past two months.
Take a look at that weakness below.
These blue chips are supposed to help investors stay defensive.
But after posting outsized gains early in the year, they have been
under pressure. With valuations and prices remaining relatively
high, this weakness trend is well in play right now.
That's why I am such a huge fan of
High Yield CorporateBond (
, anexchange-traded fund (
) that corresponds to the performance of the
iBoxx $Liquid High-YieldIndex
. Although categorically this is aninvestment in "junkbonds ,"
there are more than few reasons why thisETF is an excellent
alternative to blue chips.
The first is its amazing dividend yield. Clocking in at an
eye-popping 6.8%, this impressive stream of income is almost three
times the size of blue chips such as Wal-Mart, IBM and Intel.
HYG also provides plenty of stability for investors looking to
avoid the volatility of the equity markets, including large-cap,
blue-chip stocks. That price stability is being driven by lower
default rates in the high-yield space. These default rates have
fallen from 13.3% in 2009 to 3.3% in 2010 and to an even lower 2.2%
in 2011. With corporate profits, margins and cash balances at
record highs, the private sector's strong financial profile is
giving investors more than a few reasons to avoid the low returns
of Treasurys and the tatteredbalance sheet of the federal
And that strong price stability has been on display in the past
month, with HYG handily outperforming the market, falling just 1.5%
against the S&P 500's 5.2% decline. Take a look at the chart
Beyond yield and stability, HYG average dailyvolume of almost 5
million shares provides plenty of liquidity for individual and
institutional investors looking to initiate larger positions. A
tightbid-ask spread also enables investors to reduce price
In terms of fees, HYG'sexpense ratio of 0.5% is directly in line
with its category average, but still less than most actively
managed high-yield bond funds.
The combination of liquidity, spreads and an attractive expense
ratio has fueled investor interest in the HYG, pushing total assets
under management to just a pinch shy of $16 billion, making it one
of the most popular high-yield funds in the market.
Risks to Consider:
High-yield bonds carry highercredit risk than investment-grade
corporate and Treasury bonds. Although defaults have been trending
lower in the past three years, turbulence and weakness in the
globaleconomy increases the probability and volume of credit
Action to Take -->
High-yield bonds are a great alternative to general equity
exposure, particularly to large-cap blue chips that pay adividend .
Not only does HYG's high-yield of almost 7% crush any dividend in
the Dow, but prices are proving to be more stable. All in all,
this fund is an attractive combination of yield and stability in an
era of anemic interest rates.
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