Investors have turned to investment-grade corporate bond exchange traded funds for their more attractive yields over depressed payouts in government debt and relatively safety over higher-yielding assets.
For instance, the iShares iBoxx $ Investment Grade Corporate Bond (LQD) has a 8.59 year duration and a 2.84% 30-day SEC yield, compared to the 1.50% yield on benchmark 10-year Treasury notes.
According to S&P Global Ratings data, U.S. investment-grade composite spread over Treasuries were at 196 basis points as of July 27, moderately lower than its one-year moving average of 215 basis points but moderately wider than its five-year moving average of 189 basis points, which suggests that investment-grade bond prices can still rise or yields can still fall.
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“We expect demand for investment-grade U.S. corporate bonds to remain in the second half of 2016 and think LQD offers a strong holdings, low costs and ample liquidity for exiting and potential ETF investors,” writes Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, in a note.
Year-to-date through July 22, fixed-income ETFs attracted $62.2 billion in net inflows, with investment-grade corporate bonds attracting $13.7 billion. LQD brought in $6.2 billion alone.
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LQD tries to reflect an index of U.S. dollar-denominated and liquid investment-grade corporate bonds. The underlying index includes about 1,600 holdings diversified across issuers and include companies in energy, financials, information technology and telecom sectors with strong credit profiles, Rosenbluth said.