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High Quality Vs. Low Quality Bonds

Bonds are similar to interest-only mortgages. For example, a company may sell a bond to an individual investor for $1,000 and promise to pay 5% interest for ten years and then give the investor back the $1,000 at the end of year 10. Similar to individual mortgages, companies with stronger balance sheets and better credit history will pay a lower interest rate. The Barclay’s Aggregate Index (AGG) tracks high-quality debt (government & corporate). In contrast, the iShares iBoxx High Yield Index (HYG) tacks low-quality company debt; therefore, it pays the investor a higher dividend.

Why would one want to own high-quality bonds if low-quality bonds pay a higher dividend? First of all, in the most recent market selloff, the HYG sold off ~22% while the AGG sold off only ~5%. The panic selloff has subsided, and both funds have recovered much of their value. HYG is down approximately -4%, and AGG is up +6%. That’s still a 10% difference.

ETF of the Week: iShares Core Small Capitalized ETF (IJR)

iShares Core Small Capitalized ETF (IJR)was the best performing ETF last week at 3.8%. IJR invests in companies with a market capitalization of $600 million to $2.4 billion. Small Capitalized Stocks are known for being much more volatile than the bigger cousins S&P 500 ETF (SPY). Companies in SPY must have a market capitalization of at least $8.2 billion.


 
 
 

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Strava Financial, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Strava Financial, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Strava Financial, LLC unless a client service agreement is in place.

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