Be smarter than Harvard and dump your junk bonds

The Harvard University endowment’s largest holding is a high-yield bond exchange traded fund (ETF). So says a recent Bloomberg article on endowments moving into index funds.

While there’s nothing wrong with using low-cost index-tracking ETFs to gain access to an asset class, owning junk bonds today is a poor proposition. Here’s why.

The iShares iBoxx High Yield Corporate Bond ETF HYG, +0.18% the fund the Harvard endowment owns, currently yields around 5%. That might seem fine, given that 10-year U.S. Treasury notes TMUBMUSD10Y, -0.28% are yielding just under 2.2%. After all, what’s so bad about earning 2.8 percentage points annually more than a Treasury, even if you are taking more credit risk?

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