Amid concerns of rate tightening by the Federal Reserve and impact that higher interest rates could have on lower-rated borrowers, investors have not been shy about pulling capital from high-yield corporate bond exchange traded funds this year.
Year-to-date, investors have yanked a combined $3.4 billion from the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest junk bond ETFs by assets. [The State of Junk Bond ETF Flows]
Investors have had a far more sanguine view of investment-grade corporates as evidenced by the $1.1 billion that has flowed into the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD). However, with a duration of almost 7.7 years, LQD is not exactly free of interest rate risk.
To be fair, no bond ETF is entirely free of interest rate rate risk, but one ETF focused on corporate debt that helps mitigate investors’ exposure to fluctuations in borrowing costs is the SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: SCPB).
Predictably with a shorter duration ETF, investors will sacrifice yield. SCPB has a 30-day SEC yield of just over 1% compared to 3.1% on LQD. However, SCPB’s rewards extend beyond. For an annual fee of just over 12 basis points per year, investors are treated to a modified adjusted duration of just 1.87 years, according to State Street data.
In terms of credit quality, SCPB truly is a high-grade option with over 57% of its 990 holdings carrying ratings of Aa or A. [Fed Protection With These ETFs]
No holding accounts for more than 0.61% of SCPB’s weight. The ETF has another advantage, particularly if interest rates do in fact rise.
“Compared with longer-term bonds, short-duration investment grade bonds may benefit earlier from increased income from the fund’s underlying bonds in a rising rate environment,” said State Street in fixed income research published earlier this year. “Investors may wish to focus on corporate issues and avoid exposure to government-related sectors that are either highly leveraged or low yielding, which can be found in more traditional credit exposures.”
In what may be a sign that investors are betting on higher rates, SCPB has hauled in $740.5 million of its $3.66 billion in assets under management this year.
SPDR Barclays Short Term Corporate Bond ETF
Tom Lydon’s clients own shares of HYG, JNK and LQD.