A plethora of new yield-producing securities have been created in recent years to provide decent income in a low-interest-rate environment.
Exchange-traded funds (ETFs) based on high-yield bonds represent one example.
But Vanguard Group founder Jack Bogle warns investors against taking on too much risk. “What investors have to be careful about is crawling out so far out on that limb to get more yield that the limb doesn’t snap off, and they’re all of a sudden on the ground,” he told CNBC.
“I’d worry, and I’d give a lot of attention to the risk involved in these new instruments designed to improve yield. I think most of them should not be bought.”
Meanwhile, the Federal Reserve’s massive easing program has played a major role in the five-year bull market for stocks, Bogle said.
“If [the Fed] hadn’t done what they had done, corporate earnings would not be as good,” he said.
Low interest rates “reduce a major corporate cost,” giving investors a “nice bump of confidence,” Bogle said.
But the Fed’s easing hasn’t sparked a vigorous rebound in the economy over the past five years.
“So why did the monetary base increase not cause a proportionate increase in . . . GDP?” St. Louis Fed Bank researchers Yi Wen and Maria Arias ask in a report on the bank’s web site.
“The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money.”