Corporate Bond ETFs Capturing Investors' Attention

If not for fixed income exchange traded funds, February could have been a rough month on the inflows front for ETFs.

“Of the $14.2 billion in total ETF inflows (and $18.3 ex-SPY) for February, bond ETFs have garnered $17.4 billion of those flows. Which is to say: essentially all of them,” noted Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York. [Believe It: ETF Outflows]

Over the $17 billion that flowed into bond ETFs, $3 billion was directed to investment-grade corporate bond funds, according to a new research note from S&P Capital IQ.

A dwindling number of potential corporate downgrades could be one catalyst luring investors back to ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), the largest U.S. corporate bond ETF.

As of the end of February, the number of potential downgrades declined to 505, from 513 in January, according to Standard & Poor’s Ratings Services Global Fixed Income Research team (S&P Capital IQ operates independently from Standard & Poor’s Ratings Services). The count trended generally lower since November 2012, and is now at its lowest since March 2012,” says S&P Capital IQ Director of Research Todd Rosenbluth.

The research firm has an overweight rating on the $16.5 billion LQD. LQD has a 30-day SEC yield of 3.2% and is up 1.5% this year, indicating the fund has benefited from a slide in 10-year Treasury yields.  LQD, which has an effective duration of 7.6 years, fell 2% last year as Treasury yields spiked.  [Investment-Grade Corporates Caught up in Bond Sell-Off]