Anyone invest in CCC rated bond ETFs?

[dirtbiker]

Hello all,

I'm adjusting my AA a bit. I'm 42, with a goal of retiring at around 57-58. Right now, I'm pretty aggressive in my AA. I'm 94% stocks, 1% bonds, and 4% cash.

Within my stocks, I have:
71% S&P500 ETFs
14% Individual stocks (largest single stock is 2.5% of my investments)
5% mutual funds
3% NASDAQ ETFs
1% Russel 2000 ETFs

I'd like to readjust to around a 85/10/5 stocks/bond/cash AA. I would like to decrease my individual stock holdings as well. With interest rates still high, and almost certainly going lower, I want more exposure to bonds, and as I inch closer to retirement, I want to decrease my exposure a bit to stocks anyhow.

As part of the AA change, I've been considering investing in XCCC, a CCC rated corporate bond ETF. I wouldn't plan to have more than 2% of my total investments in this ETF.

Has anyone else invested in junk bond ETFs? Any thoughts?

 

[Out-to-Lunch]

Conventional wisdom holds that junk bonds behave more like equity than other bonds do. I had assumed that your AA realignment had the goal of reducing volatility of your portfolio (not that a 10% bond allocation was going to dampen it much anyway). But adding 10% of a junk bond fund will do little to dampen volatility or to provide down-side protection.

 

[Koolau]

Yes, I was going to ask what you are attempting to accomplish by your AA adjustment. Less volatility? More safety? ??

 

[Texas Proud]

Nope... not interested in them... the risk/reward ratio is not there...

I do go down to BB... and have one bond that was BB that went to CCC but still paying... sold half of it and taking a flyer on the other half..

 

[dirtbiker]

Conventional wisdom holds that junk bonds behave more like equity than other bonds do. I had assumed that your AA realignment had the goal of reducing volatility of your portfolio (not that a 10% bond allocation was going to dampen it much anyway). But adding 10% of a junk bond fund will do little to dampen volatility or to provide down-side protection.

I have never invested in junk bonds before, and have never bought individual bonds either; only ETFs.

My goal is to both reduce volatility and add bond exposure, as there is a big upside to bonds given the lower future interest rates. Just to be clear, if I would add this ETF, it would be 1-2%, not the entire 10%. For the majority (or all of it, if I pass on junk bonds), I'll buy BND or LQD.

 

[dirtbiker]

Yes, I was going to ask what you are attempting to accomplish by your AA adjustment. Less volatility? More safety? ??

I tried to add you as well as out-to-lunch, but messed it up. See my reply to him/her.

 

[dirtbiker]

Nope... not interested in them... the risk/reward ratio is not there...

I do go down to BB... and have one bond that was BB that went to CCC but still paying... sold half of it and taking a flyer on the other half..

Just thinking aloud, but is buying individual BB bonds less risky than a CCC ETF? I'm genuinely curious what you all think about this?

 

[Koolau]

Well, it's certainly reasonable to expect better bond results going forward since rate cuts seem inevitable - though perhaps not as soon as we all thought (or hoped). But if it were me - and it's not - I'd go for higher quality bond (funds) for a potentially smoother ride. Just my thinking on the subject.

 

[SnowballCamper]

I now know to use individual bonds in a ladder, and highly recommend it. One of the great things I learned here and it is way easier than I thought.

 

[Flieger]

Lowest I have gone for this is JBBB which holds a mix of AAA and BBB. This is for short term holdings.

Flieger

 

[MichaelB]

Just thinking aloud, but is buying individual BB bonds less risky than a CCC ETF? I'm genuinely curious what you all think about this?

Not TP but I will still post about this. An individual BB bond is indeed less risky. The high yield eft holds lower credit rating bonds, which by definition makes it riskier. The high yield spread is the lowest it’s been in a decade and is now at the same level as it was just before the GFC of ‘08. In other words, the amount you’re getting to take on that additional credit risk is low.

You want to bet on a decline in interest rates. If that doesn’t happen, you could a big chunk of your investment in thst fund.

High yield spread here ICE BofA US High Yield Index Option-Adjusted Spread

 

[Out-to-Lunch]

My belief is that this asset class isn't a good one to meet your goals. Having said that, a 2% allocation isn't really meaningful one way or 'tother, so you should do whatever strikes your fancy!

 

[pb4uski]

CCC is too low for me. If the objective is to reduce portfolio volatility the CCC doesn't really work since that asset class is fairly volatile. If the objective of adding bonds is to reduce volatility I would stick with investment grade bonds.

I'm not a big fan of BND or any bond mutual fund or ETF for that matter, epecially in retirement (but I know you are not there yet). If I have cash flow needs I can manage the reinvestment of income and maturity proceeds of individual bonds to meet the need where with funds I have no choice but to sell.

If you're looking for convenience, you could look into buying a ladder of target maturity bond ETFs (either Treasury, TIPS of corporate bond flavors, though Treasuries and TIPS are easy enough to ladder using individual bonds). Invesco Bulletshares or BlackRock iBonds are interesting products. I have owned Bulletshares in the past but now use individual bonds.

 

[DrRoy]

Conventional wisdom holds that junk bonds behave more like equity than other bonds do. I had assumed that your AA realignment had the goal of reducing volatility of your portfolio (not that a 10% bond allocation was going to dampen it much anyway). But adding 10% of a junk bond fund will do little to dampen volatility or to provide down-side protection.

XCCC has volatility but has not even risen like the stock market over the last 5 years.

 

[dirtbiker]

Thanks for all the replies everyone. I think I will pass on these. I was on the fence, and wanted to hear some opinions, and am glad I did.