Turning to ETFs
Investors seeking exposure to investment grade or high yield corporate debt have increasingly been using fixed income ETFs, allowing them to get precise exposure to specific segments of the corporate bond market while gaining diversification. The over-the-counter nature of the bond market can make it difficult for most investors to build diversified portfolios, and ETFs can provide a more efficient way to transact. Here are several ways to play the corporate fixed income ETF space in your portfolio. As you can see, these segments have been growing along with the broader corporate bond market:
- For exposure to investment grade corporate debt, we like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has grown by $2.55 billion over the past 3 years.
- For short-term U.S. investment grade corporate and non-corporate debt, the iShares 1-3 Year Credit Bond ETF (CSJ) is a potential solution. This was an especially popular investment in 2013 when fears of rising interest rates were top of mind for many investors. Over the past three years, investors have added $3.2 billion to the fund.
- Those seeking shorter term investment grade bonds whose coupons adjust to changes in interest rates may want to look at the iShares Floating Rate Bond ETF (FLOT), which has seen $4 billion of inflows since August 2011.
- For U.S. high yield corporate bond exposure, a potential solution is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). Despite the recent sell-off we have still seen over $2.9 billion come into this fund over a three-year period.
So is the recent growth in corporate bond borrowing a good thing? As Russ points out, it is a sign of increased borrowing and leverage in the economy, and if left unchecked, it could lead to financial challenges down the road. That said, for now the increased supply is serving to help meet investors’ need for income, while the ETF provides a diversified source of income that is designed to trade like a stock. No matter what comes next, diversification and access to liquidity are definitely key in helping you stay on top of your investments.
Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.