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Personal Finance > Ask the Expert
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'Safe' junk bond funds
graphic November 19, 2001: 2:20 p.m. ET

What are some safe high-yield bond funds?
MONEY columnist Walter Updegrave
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    NEW YORK (CNN/Money) - What are the safest high-yield bond funds currently?

    Gee, I consider the words "safest" and "high-yield bond funds" (aka junk bond funds) a bit of an oxymoron, kind of like lady mud wrestlers and unbiased journalists. The fact is that some investments are just too volatile for us to even think of as being in the "safe" category -- and high-yield bond funds is one of those investments.

    Regular bond funds often move in the opposite direction of stocks during market downturns. While stock funds were getting clobbered with double-digit losses over the 12 months through October 31, for example, Morningstar's intermediate-term government bond-fund category gained 13 percent. But junk bond funds often act more like equities than bonds, largely because they carry risks that are more similar to those in stocks than bonds (which is why they pay those high yields in the first place). So while regular bonds were climbing in value as stocks declined, the high-yield bond category lost 4.2 percent of its value.

    That's not to say, of course, that some junk bond funds might not be "safer" -- or less volatile -- than others. You can find some junk funds that don't load up on the junkiest junk -- that is, the bonds with the lowest ratings from organizations like Standard & Poor's and Moody's -- or that leaven their junk holdings with some high-grade issues.

    To do that, however, you would have to get at the fund's underlying holdings, which would mean making lots of phone calls to lots of funds or firing up software like Morningstar Principia, which gives information on the ratings of the bonds in a fund's portfolio. As an alternative, you could go to CNN/Money's Find a Fund tool, and search for high-yield funds that have above-average long-term performance but that have also held up better than their peers over the past year.

    But I'd be careful about going down that road since it may lead you to believe you're more insulated from setbacks than you actually are, much the same as investors thought that buying the big names in tech stocks -- Cisco, Microsoft, Intel, etc. -- would insulate them from a downturn in that sector.

    Bottom line: junk bond funds have provided superior returns to investment-grade bonds in the past, and likely will do so again in the future. But if you buy high-yield or junk bond funds, you should expect to go through periods where these funds get hammered. Unless you're completely unfazed by that possibility, you may want to limit them to a small portion, say 20 percent or so, of your bond holdings. graphic

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    Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

    Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

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    Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

    Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.

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