Here's a hack for finding mutual funds with yields way above the 10-year Treasury's — about 2.8% at the moment — and ranking them by various factors, so you end up with funds whose risk-reward mix of yield and risk factors you're comfortable with.
Finding high yield alone is easy. Finding the right balance between yield and risk is the hard part. And it differs for everyone.
Fidelity.com is one of many financial sites that offers an online screener that identifies high yield funds and shows you other factors you need to weigh to find your risk-reward balance.
You can limit your search to Fidelity's own funds, or widen it to include funds from other providers. And you can limit your search to funds that are "relatively safer" — Fidelity's terminology. Still, it's really up to you to decide if the funds you turn up meet your own definition of relatively safer.
Yield Via Dividends, Interest, Et Cetera
Fidelity Vice President Leanna Devinney, branch leader at Fidelity Investments, told Investor's Business Daily, "Fidelity's fund screener is a great tool to filter, sort and compare funds to find what you're looking for. And it's important to further consider your financial goals, time horizon, and risk tolerance before making any investment."
One key factor: You can limit your search to funds that have "paid a good 30-day yield."
Thirty-day yield, or SEC yield, is a standardized calculation. It estimates an investor's yield over the next 12 months based on income over the past 30 days.
Start With 277 Funds
Those criteria — relatively safe, good recent yield — churn out a list of 277 funds from all providers. Their yields range from about 2% to 14%. Yield data can vary the further away your research date is from the end of the prior month.
You can rank those funds by many factors. Those include yield, expense ratio, returns over various time periods and whether or not funds charge a sales load. You can also rank by average maturity, average duration and standard deviation. All data is as of March 31.
Average maturity tells you the average amount of time it will take for a fund to get its principal back for its bonds. In general, longer maturity is more risky amid rising rates.
Average duration refers to a bond's sensitivity to interest rate changes. The higher a bond's duration, the more the bond's price will change when interest rates move.
Standard deviation is way to measure a fund's volatility. It tells you how much and how often a fund tends to veer away from its average performance.
Take SPDR S&P 500 ETF. SPY tracks the S&P 500 index. Its three-year standard deviation (SD) as of March 31 was 17.71.
SPY's three-year average annual return was 18.84%. So its 17.71 SD means that 68% of the time over the past three years, SPY's return was between negative 1.13% and positive 36.55%. And 95% of the time, its returns were between -1.58 and 54.26.
Further, you can restrict your hunt to funds with low expenses.
The Cost Of Yield
So what does all of this get you — besides feeling like you've returned to your junior year algebra class?
One key take-away is that you can look for mutual funds that offer high yield with minimal erosion of their share price. Just remember, very few of the funds have positive total returns so far this year.
One example, $3.1 billion PIMCO All Asset All Authority Fund I-3 Fund (PAUNX) had a 30-day yield of 14.02%. That was the highest in the screen results. Its year-to-date return was a 2.81% setback (per Morningstar Direct), its three-year average annual return 6.68%. The fund aims for hefty real returns while countering the effects of inflation. To do that, it invests in a variety of assets. It diversifies away from mainstream stocks and bonds. At nearly 20%, its biggest asset class weighting is emerging markets bonds.
Stablemate $10 billion PIMCO Commodity Real Return Strategy Fund Class A (PCRAX) had a 30-day yield of 7.48%. Its year-to-date return was 32.21%. The fund's three-year average annual return was 19.25%. It invests in a broad basket of commodity index based derivatives. They're backed by inflation-indexed bonds and other fixed income securities. Commodity prices tend to thrive amid rising inflation. Its three largest commodity areas of exposure were energy, at 34%; agriculture, at 29%; and precious metals, at 17%.
The $1 billion BlackRock High Equity Income Fund Investor A Shares Fund (BMEAX) had 30-day yield of 6.06%. Its year-to-date return was 4.17%. Its three-year average annual return was 11.97%. The Fund invests in common stocks that pay dividends and have the potential for capital appreciation. It also generates income through covered calls. With covered calls, an investor (the fund) buys a stock and at the same time sells the stock's potential price gain above a specific price to another investor. That sale generates income, which can be dished out to shareholders.
The fund's biggest sector weights as of Dec. 31 were financials, 24%, and health care, 19%.
Bond Fund Risk
One of the screen's footnotes reminds users that past performance is no guarantee of future results.
Once you identify mutual funds that offer high yield, remember that companies tend to offer high yield to make up for dangers like high credit risk.
Also bear in mind that at a time like now, when interest rates are climbing, share prices of high yield bonds, stocks and mutual funds are liable to erode. "With higher yield comes higher risk, as higher yields offered by some bond funds could potentially have underlying securities with lower credit qualities," Devinney said.
Denny Artache, president and CEO of Artache Financial Group, described a potential worst-case scenario: "Bond funds are going to get smashed as rates go higher."
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
