Speculative grade bonds come with attractive yields, but investors have started to hedge against riskier bets. Meanwhile, investment-grade corporate debt exchange traded funds are starting to outperform as investors move toward safety.
The iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) has gained 2.2% over the past month while the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) rose 0.9%.
Given the recent bout of uncertainty in the equities markets, investors moved back into safety. Investment grade corporate offer a nice mix of yield and safety, an ideal combination in this market environment, writes Eric Dutram for Zacks. [iShares Launches Target-Date Corporate Bond ETFs to Hedge Rising Rates]
“U.S. corporations are doing very well. They have record amounts of cash on their balance sheets, and profit margins are at all-time high levels,” according to Morningstar analyst Timothy Strauts. “Defaults are not expected to be a major concern in the next few years, because companies have positioned themselves conservatively. Many equity investors feel that corporations are being too cautious and not taking enough risks. From a bond investor’s perspective the current air of cautiousness may allow credit spreads to tighten even further.”
Additionally, with deflationary pressures and a stubbornly high unemployment rate, the Federal Reserve does not look like it will tighten monetary polices any time soon, giving intermediate-term bonds more breathing room. [iShares: The Great Duration Rotation Continues – But For How Long?]
LQD offers a 30-day SEC yield and comes with a 0.15% expense ratio. The bond ETF has a 7.93 year effective duration. The duration is a measure of the bond’s price sensitivity toward shifts in interest rates – bond prices and interest rates have an inverse relationship, so a higher interest rate translates to a lower bond price.
Looking at the fund’s credit quality, LQD is largely comprised of investment grade bonds AA 15%, A 53% and BBB 28%.
Another intermediate-term corporate debt ETF includes the iShares Barclays Credit Bond Fund (NYSEArca: CFT), which has a 2.36% 30-day SEC yield, a 0.20% expense ratio and a 6.67 years effective duration. CFT’s credit quality allocations include AAA 8.5%, AA 13%, A 43% and BBB 32%.
The Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has a 0.12% expense ratio, a 6.5 years average duration and a 2.57% 30-day SEC yield. Credit qualities include Aaa 1.1%, Aa 6.7%, A 45.8% and Baa 46.3%.
Additionally, the PIMCO Investment Grade Corporate Bond Index ETF (NYSEArca: CORP) comes with a 2.46% 30-day SEC yield, an effective duration of 6.54 years and a 0.20% 30-day SEC yield. CORP’s credit breakdown includes AAA 1.0%, AA 11%, A 40% and BBB 38%.
For more information on corporate bonds, visit our corporate bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own HYG and LQD.