High-yield bonds and funds
A small group of high-yield bond funds have caught the attention of investors since 2008. Hungry for higher yields, investors have paid closer attention to bond funds that offer high-dividend yields by specializing in municipal or corporate debt.
These high-yield bond funds are available as mutual funds, closed-end funds and exchange-traded funds. "Funds are usually better than buying bonds themselves because, when it comes to investing, there's safety in numbers," says Marks, referring to the number and variety of bonds in a typical portfolio. "Still, in this environment we remain cautious and defensive when it comes to investing in bond funds."
As rates rose in 2013, many bond funds fell in value on the fear that higher rates will cause the bonds to fall even further in the future. "We have warned investors for a long time that chasing yield is dangerous and usually ends badly," says Marks, who adds that the recent decline "has been evidence of the risks in chasing yield."
This doesn't mean that Marks sees no place for high-yield bond funds in a well-diversified portfolio. "In moderation, a small amount of high-yield funds operating in municipal or corporate debts will suit many investors," Marks says.