However, interest-rate risk remains a primary issue, Gabriel added. Consequently, ETF investors can look to investment-grade corporate bond funds with a shorter duration to diminish rate risks.
For instance, the SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) has a 4.38 year duration, compared to LQD’s 7.95 year duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a lower duration means a fund is less sensitive to a rate rise – a 1% increase in interest rates would translate to about a 4.38% price decline, compared to about a 7.95% decrease for LQD.
However, ITR comes with a lower 2.66% 30-day SEC yield. Investors would have to weigh the benefits of reduced rate risk exposure against the costs of a lower yield.
Moreover, Gabriel pointed out that the corporate market remains relatively healthy, despite carrying greater credit risk over the U.S. Treasuries.
U.S. companies “have fortified their balance sheets in recent years and currently have ample cash. The last time an investment-grade-rated company defaulted was 2011, and the average default rate since 1981 for investment-grade debt is 0.11%,” Gabriel said.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.