Guggenheim—yield with less interest rate risk?

If you are looking for low risk yields above 1.5% per year, there aren’t many attractive candidates.   Stocks seem risky, and if you believe that interest rates are going to go up in the next couple of years then bonds look risky too.

Using IEF, Ishares’ 7 to 10 year US treasury bond fund as a example of risk—it  is currently yielding  2.21%.  Sensitivity to interest rates in bonds is quantified by a attribute called duration, which indicates how much a bond’s current value would change if interest rates changed by 1%.  IEF’s duration is currently 8 according to Fidelity’s key statistics page (no sign in required).  If IEF’s blend of  treasury bonds goes from yielding 3% to 4% its value would drop by 8%—wiping out more than three years worth of interest.

Bond funds like IEF continually roll over their bonds so that they keep a consistent duration.  Guggenheim, on the other hand has created a set of  bond funds with fixed end dates.  Their duration with decrease overtime until they terminate..   They currently offer end dates of  2013 (BSJC) through 2017 (BSJH) for their high yield corporate bond funds, which currently are yielding annual dividends starting at 4.7%, and  durations starting from less than 1 up.   Hmmm almost too good to be true…

So what’s the catch?  The catch is the credit rating of the bonds in the fund.   All the fund’s holdings are rated BB+ through CCC-, below investment grade—junk bonds in industry parlance.  With Guggenheims’  BSJD through BSJH series you have exchanged most of your  interest rate risk for default risk.   These funds reduce their risk by investing over a broad range of sectors (e.g., financials, cyclical consumer), and by investing in quite a few different bonds (37 currently).  There isn’t much history, but my suspicion is that these funds will hold up well—unless we have another 2008/2009 style financial meltdown.

BSJD info    Family Prospectus as of 2-Mar-12



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