That's much better than the yields of the 2 ETFs where we found them
Today, the U.S. lives in a low-yield environment. The S&P 500 stock index and U.S. Treasury bonds both yield less than 2%. Meanwhile high-yielding junk bond ETFs yield less than 4%. If that's a high yield, we'll pass!
With a little effort, we found bonds issued by three publicly-traded companies that offer yields-to-maturity (YTM) as high as 8.27% and could be the cure to your income problems.
Bonds issued by companies with publicly traded stocks get a very public warning signal if trouble is brewing . That warning sign is the price of the stock! If the stock has value, the bonds are good.
Who are we? We're Arthur. We're simplifying the process of purchasing a bond in order to offer investors easy access to the bond market. We're building Arthur as a community, so that together we can learn how the $50 trillion bond market can be harnessed to fund every single one of our future cash flow needs without paying for the packaging.
Yield is the amount in cash annually generated by an investment. It is typically expressed as a percentage of the investment's cost or current market value.
A bond's yield to maturity (YTM) is the (theoretical) internal rate of return earned by an investor who buys the bond today at the market price, assuming that the bond is held until maturity, and that all coupon and principal payments are made on schedule.
We scoured the holdings of two high-yield bond ETFs ($FALN and $HYG**) and discovered three hidden gems, which can add 6%, 7% and even 8% yields to your portfolio.
These might not be the sexiest investments you've ever seen, but they could be the most dependable. They'll make you look super-smart to your friends and lock in predictable cash flow for years!
These bonds have publicly traded equities to serve as warning indicators - if the stocks have value, the bonds are good
Where are interest rates going to be next year, or in 2025 or in 2028? Nobody knows.
A lot of people pretend to know, but they're just guessing. While some may be better guessers, it doesn't matter what happens to interest rates when you buy individual bonds directly. You earn the same yield each year and when the bond matures, you get your money back regardless of what happens to rates.
Let's look at one of those high-yield ETFs.
The iShares Fallen Angels USD Bond ETF (ticker: FALN) is a well-run ETF that provides exposure to a diversified portfolio of "Fallen Angels" (once good companies that have become kind of junky). We looked through their 372 holdings and discovered that a Rite Aid bond that represents a measly 0.13% of the ETF's portfolio has a yield-to-maturity (YTM) of more than 8%.
Just to clarify, FALN has a 30-day SEC Yield of 3.16% and an average maturity of 8.6 years while the Rite Aid bond has a YTM of 8.27% and matures in less than 6 years. By buying the bond instead of the ETF that holds it, you get 5.11 percentage points more yield plus far less interest-rate exposure.
How is this possible? Dilution.
In a bond ETF or mutual fund your dollars in are comingled with other people's money Maybe you want more of those Rite Aid bonds that mature in 2027.
Too bad, no bonds for you!
You can't have them because you literally have to share that one bond you want with the thousands of other investors in the fund, and you pay for that.
This is called dilution. Your ownership of the bond you want is diluted by bonds you don't want so the portfolio manager can easily manage a whole bunch of money.
If you own FALN, be assured, iShares charges a very reasonable 25 basis points, or 0.25% of your investment, and is really good at doing exactly what they tell you. In the case of FALN they expose you to a several hundred names in one bond portfolio.
But, what if you don't want a 372-bond portfolio? You might want a high current income and to get your money back in early 2027. Why pay someone to hold all those extra positions when you can find an individual bond that fits your needs precisely?
Because it works for them.
ETFs and Mutual Funds are operated in a way that makes it easy for the manager to manage and allocate bonds across a lot of portfolios and protect their revenue model. Every financial product that you look at has complex rules that govern their operations and those rules have consequences.
If the fund follows a publicly disclosed benchmark index it is run by rules that may or may not be consistent with maximizing your current yield and preserving your principal. In the case of FALN we can see that the duration of 5.98 years means that if interest rates go up 100 bps (1 percentage point) you're going to lose about 5.98% of your investment from market value decline.
If interest rates go up 2 percentage points you will lose 11.96%, or 2x that amount.
Seriously, the math is that simple.
Let's go back to the Rite Aid bond. it pays 5 percentage points more every year until it matures in 2027 no matter what happens to interest rates. At that time the principal is returned. This significantly limits your interest rate exposure.
The difference is clear.
I don't want to be diluted, do you?
Approximately 1/2 of the bonds in any ETF yield anywhere from more, to way-more, than the ETF itself.
The fund manager is selling me a combo meal, when all I want is a protein-packed super bond.
Bonds, issued by publicly traded companies are good as long as their stock has value and many of them have much better yields than the ETFs that hold them.
Why can't I just buy the bond I want?
Because it's not in the interest of bond funds to deliver that option to you and buying individual bonds can be difficult.
Bond yields of 6%, 7% and 8% may be difficult to find, but not impossible. These three examples are proof positive that you can earn more on, and have better control over, your money by investing in individual bonds.
3 Bonds With Way Better Yields than the ETFs We Discovered Them Inside
#1 TRIUMPH GROUP INC
Maturity: August 15, 2025 CUSIP: 896818AP6
Price: $102.77 0.05% exposure discovered in HYG
Related Equity Ticker: TGI Listed: NYSE
Market Cap: $1.4 Billion
Triumph Group serves the global aviation industry, including military and commercial aircraft operators. It designs, engineers, and manufactures a broad portfolio of aerospace and defense systems.
Triumph Group Inc. (TGI)
One Year Stock Price Chart
#2 GENESIS ENERGY LP
Maturity: February 1, 2028 CUSIP: 37185LAL6
Price: $103.08 0.07% exposure discovered HYG
Related Equity Ticker: GEL Listed: NASDAQ
Market Cap: $1.38 Billion
Genesis Energy is a master limited partnership that provides a suite of midstream services to the crude oil and natural gas industry. These services include transportation, storage, sulfur removal, blending, terminalling and processing.
Genesis Energy LP (GEL)
One Year Stock Price Chart
#3 RITE AID CORPORATION
Maturity: Feb 15, 2027 CUSIP: 767754AJ3
Price: $97.47 0.13% exposure discovered in FALN
Related Equity Ticker: RAD Listed: NYSE
Market Cap: $904 Million
Rite Aid Corporation is a healthcare company that operates a retail drugstore chain.
Rite Aid Corporation (RAD)
One Year Stock Price Chart
Of course, there's some risk. Bonds can default. However, as a bondowner you're on par with all the other owners, and get treated exactly the same in recovery. So, at least in the case of these three (heavily owned by iShares), if something did go wrong, you have iShares working through the recovery, effectively on your behalf and you don't have to pay them anything for doing the work.
Buying your bonds directly is the best way
Direct investment provides certainty in holding period returns while funds are bets on interest rates and manager skill, or lack of skill.
Owning a bond directly offers you the choice and flexibility of finding something that fits your investment horizon, goals, values and social preferences without the extra management fees and other indirect costs.
Owning bonds directly allows you to get cash via the interest and coupons and cut out the middleman; there are no management fees to detract from your hard earned coupons.
Owning bonds directly means that when a bond matures, you get your money back.
Arthur will make bonds accessible to everyone.
The Founders of Arthur come from the investment management industry. We've witnessed the restricted access to direct bond investment firsthand and understand just how much money is being made on the backs of retail investors.
Soon, Arthur will eliminate the need to wait for bond auctions, substantial per-security minimum investment amounts, and the enormous spreads in the retail secondary market. Once we do that, there will no longer be any need for a bond fund wrapper, or manager to build a completely customized, diversified portfolio of bonds.
This will save you a ton of money over your lifetime!
Sign up for early access here and be a fundamental part of the democratization of the institutionally-restricted bond market.