Corporate Bond ETFs: Investors Favoring Investment-Grade Over Junk

November 23rd at 8:56am by John Spence

Investors are opting for quality over yield in corporate bond ETFs, recent buying patterns show. Investment-grade funds are holding up a bit better than junk-bond ETFs amid a rocky market the past couple months.

Since the end of September, iShares iBoxx Investment Grade Corporate Bond (NYSEArca: LQD) has attracted inflows of $890.1 million. The two largest junk-debt ETFs, iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK), have seen outflows of $1.2 billion and $488 million, respectively, according to IndexUniverse data.

LQD, the investment-grade ETF, has a 30-day SEC yield of 2.76%. Its junk-bond iShares counterpart pays 5.74%, according to manager BlackRock (NYSE: BLK).

Although the yields are lower, investment-grade corporate bond ETFs are viewed as lower-risk investments since the companies issuing the debt are stable with good credit, reports Trang Ho at Investor’s Business Daily.

“These companies generally incur lower risk profiles and have more consistent cash flows that can help them weather the impact of macroeconomic factors such as the potential slowdown from the failure to resolve the fiscal cliff,” said Todd Rosenbluth, ETF analyst with S&P Capital IQ, in the article.

U.S. investment-grade bond funds took in $2 billion in the week ended Nov. 14, while investors pulled $7 billion out of U.S. equity funds and more than $1 billion from high-yield bond funds, the most since early June, according to the IBD story.

In fact, traders are using high-yield ETFs to make bearish bets against junk bonds in the options market. [High-Yield ETFs Suffer Outflows Amid Record Bearish Bets]

Also, while the CBOE Volatility Index has been relatively flat despite fears over the U.S. fiscal cliff and European debt, implied volatility in high-yield bond ETFs has surged. [High-Yield Bond ETF Implied Volatility Skyrockets]

iShares iBoxx Investment Grade Corporate Bond

Full disclosure: Tom Lydon’s clients own LQD, HYG and JNK.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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