Tuesday, February 28, 2012

This High-Yield ETF Could Move +20% Higher

By Dr. Melvin Pasternak,
With rock bottom interest rates, Mr. Market remains on the prowl for high-yielding securities. As a result, I've focused several recent Trade of the Week articles on finding secure blue chips with healthy, rising yields.

For traders willing to accept more risk, I've tuned to one of the hottest segments of the market: junk-bond ETFs.

BlackRock Investments reports that inflow into global fixed-income ETFs hit an all-time high of $9 billion this January 2012, up 34.3% from the previous record high of $6.7 billion in January 2009.

According to a recent Wall Street Journal report, in 2011, high-yield bond ETFs saw a 68% inflow increase from the previous year. Traders are likely rushing in for several reasons. First, the Fed has stated interest rates are likely to remain low, until at least 2014. Second, the default rate on junk-bond companies remains at historically low levels.

Risk appetite also seems to be on the rise with upbeat domestic data showing the economy may be starting to mend. For example, January's jobless claim numbers just hit a nine-month low. Lastly, yield spreads -- the difference between the yield on "risk-free" treasuries and junk bonds on comparable term maturities -- are contracting. Since yields and bond prices move inversely, contracting yield spreads means rising bond prices.

Because of its strong chart and bullish technical outlook, my favorite high-yield bond ETF is the SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK).

With a basket of 223 holdings and $11.1 billion in assets, JNK's bonds are primarily allocated in the industrial sector (85.4%). A smaller percentage of holdings are in the utility (7.9%) and financial sectors (6.2%). Top holdings include HCA Holdings (NYSE: HCA) bonds, maturing in 2020, Sprint (NYSE: S) notes maturing in 2018, and First Data bonds maturing in 2021.

As defined by their status as sub-investment grade, all bonds carry a debt rating of "BB" or lower. The "BB" or "junk" status denotes that the companies which issue these bonds carry high debt levels and, therefore, present a greater probability of default or bankruptcy.

However, with this greater risk comes greater reward. JNK offers an attractive yield of approximately 7.4%. The fee, or expense ratio, of JNK is just 0.4%.

From a technical perspective, JNK appears highly bullish. Year-to-date, the fund is up approximately 7.5%, besting the performance of the S&P 500.

Rising steadily off its May 2010 low near $31, JNK met substantial resistance in mid-2011 when it unsuccessfully attempted to break resistance around the $38.75 level.

The fund tested this resistance level three times in May, August and October. Each time, the ETF faltered, retreating to support near $35. On its second breakout attempt, the fund fell to a low of $33.25, briefly breaking the Major uptrend line, before regaining ground.

However, in November 2011, shares again rose above the Major uptrend line. A steep accelerated uptrend line formed shortly thereafter and the ETF has not looked back since.
In early January of this year, JNK finally successfully broke important $38 resistance, bullishly completing an ascending triangle pattern.

The fund has slowly risen since, but, until recently, was capped by resistance near $39.
However, this past February 20th trading week, it successfully surpassed this resistance, bullishly breaking a second small ascending triangle, while hitting a two-year high, near $40.

The measuring principle for a triangle is calculated by adding the height of the triangle to the breakout level; adding the two consecutive ascending triangles together gives a price target of $42.95 ($39.92-$36.89=$3.03; $3.03+$39.92=$42.95). At current levels, this represents a 7.6% gain.

However, with no nearby resistance in sight, the fund could move higher. It's not out of the question the ETF could retest its 2008 high near $48. From current levels, this gain would give traders a 20.2% return. I don't expect this movement to happen overnight; in the meantime, however, traders collect dividends while they wait.


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