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.
[related_stories]The largest issuers include strong, stable names like Apple (AA+), J.P. Morgan Chase (A-), Morgan Stanley (BBB+) and Verizon Communications (BBB+).
Specifically, LQD’s credit profile includes AAA 1.8%, AA 10.3%, A 43.0% and BBB 45.0%.
Rosenbluth, though, warned of LQD’s slightly elevated duration, which has contributed negatively to S&P’s research. Duration is a measure of a fund’s sensitivity to changes in interest rates, so a higher duration reflects a greater sensitivity to changes in rates.
“However, if rates continue to stay relatively low, investors will be further rewarded for taking on the extra risk,” Rosenbluth said, adding that the Fed will likely only hike rates once in December and raise rates three times for 2017.
For more information on the credit markets, visit our corporate bonds category.
iShares iBoxx $ Investment Grade Corporate Bond