Those wary of the potential credit risks should keep in mind that these corporate bond ETFs focus on investment-grade debt securities. Specifically, LQD has 2.4% in AAA-rated corporate bonds, 12.5% AA, 40.2% A and 44.6% BBB. VCIT includes 1.3% Aaa, 7.9% Aa, 36.5% A and 54.3% Baa.
While the Federal Reserve has stopped implementing accommodative measures, global central banks, like the European Central Bank and the Bank of Japan, have expanded their quantitative easing programs, pushing yields on their government debt into the negatives, which made U.S. bonds a relative bargain.
“Demand is probably coming from outside the U.S. Late 2016, foreign demand for U.S. corporate bonds were weaker as interest rates and dollar funding costs rose. But as the funding costs collapsed in early 2017, bond fund inflows came back and then, re-accelerated early February as Asian investors came back from Chinese New Year,” according to Barron’s.
For more information on the credit market, visit our corporate bonds category.
Tom Lydon’s clients own shares of LQD.