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The U.S. Federal Reserve's quantitative easing (QE) and zero-interest-rate policies have had investors scrambling for yield for the past several years.
That's sparked a big rally in high-yield junk bonds, including a flood of assets into high-yield exchange-traded funds (ETFs) from institutional and retail investors unhappy with the low yields found in investment-grade and government debt.
Assets have poured into ETFs including the iShares iBoxx High Yield Corporate Bond ETF (NYSE: HYG) and the SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK). The ETFs have offered investors good returns in terms of both yield and capital gains.
But with some betting the Fed is poised to end QE, these investments could be carrying a lot more risk.
Even if the Fed ends QE by "tapering" off its asset purchases, the market is likely to react sharply to the Fed's decision. This could result in an unprecedented selloff in high-yield ETFs.