The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) and other investment-grade corporate bond exchange traded funds remain valid ideas for investors seeking income and yield without high risk.
In the first quarter, LQD was the only fixed-income option among the top 10 asset-gathering ETFs. While LQD’s and the broader bond market’s performances were lackluster over the first quarter, especially in the face of a rising rate environment, BlackRock’s own strategists may have been pushing the investment-grade corporate bond trade to its readers and clients, citing the higher income provided and favoring the investment-grade credit market as a way to cushion against rising interest rates.
Safe-haven demand for fixed-income assets returned in January as investors grew wary of the recent Trump-induced rally in equities that pushed stocks to record heights. Many waited on further clarification from President Donald Trump’s administration on policy changes to justify the heightened valuations. However, some of Trump’s actions or lack of clarity triggered some risk-off action.
“We see opportunities in U.S. credit. However, credit is not cheap across the board, so we focus on higher-quality corporates within a world of tight credit spreads. We favor U.S. investment-grade credit and an up-in-quality stance in high yield. Investment-grade corporate debt offers higher yields than long-end Treasuries at less than half the volatility, our analysis shows,” said BlackRock in a recent note.
The Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has also been a prolific asset gatherer, adding $3 billion in new money this year, also enough to put it among the top 10 asset-gathering ETFs.
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.
Higher-quality corporates also offer value.
“It also looks relatively attractive versus high yield. At the beginning of 2016, U.S. high yield spreads were among the widest versus investment grade since the financial crisis. A year later, that ratio is back near post-crisis lows. We see investment grade debt as attractive in the tradeoff between yield and risk,” adds BlackRock.
For more information on corporate debt, visit our corporate bonds category.
Tom Lydon’s clients own shares of LQD.