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]
International bonds can be less sensitive in changes to U.S. interest rates, explaining why the SPDR Barclays Capital International Corporate Bond ETF (NYSEArca: IBND) gained nearly 5% last year. S&P Capital IQ rates the $281.7 million IBND marketweight.
IBND has a 30-day SEC yield of 1.2% and a modified adjusted duration of 4.92 years, according to State Street data. Approximately three-quarters of IBND’s holdings are rated AAA, AA or A. Bonds from issuers in the U.S., France, Germany and the U.K. combine for over 57% of IBND’s weight.
“Year to date, LQD and IBND rose 2.5% and 2.5%, respectively, ahead of the 2.0% gain for the widely referenced Barclays U.S. Aggregate Bond Index. We think an improving credit outlook bodes well, though as with any bond offering, the direction of interest rates will also be a factor,” according to S&P Capital IQ.
SPDR Barclays Capital International Corporate Bond ETF
Tom Lydon’s clients own shares of LQD.