By Todd Rosenbluth, CFRA
The CFRA Focus ETF for August is iShares Core 1-5 Year USD Bond ETF (ISTB). In ranking 240 bond ETFs, CFRA combines holding-level attributes, designed to highlight where risks are being taken to generate yield, with ETF-specific metrics such as expense ratio and liquidity. ISTB earns a top ranking taking these factors into account.
iShares launched the first four bond ETFs 15 years ago and since then the current division of BlackRock, (which bought iShares in 2009) has significantly expanded its lineup to include a range of investment styles. CFRA currently ranks 76 iShares bond ETFs. But unlike other research providers that focus strictly on a three-year record, we focus on the risk/rewards of each ETFs holdings and the costs related to investing in the product.
ISTB tracks a Bloomberg Barclays short-term bond index that has a mix of government, corporate and agency bonds. From a credit perspective, more than 90% of assets are in investment-grade issues, but there are small stakes in BB and B rated securities. In the investment-grade rating categories, ISTB is diversified between higher investment-grade bonds (65% are rated AA or higher) and lower investment-grade bonds (24% in A or BBB).
Within the corporate portion (35% of assets), bonds issued by Ford Motor, Morgan Stanley and Verizon Communications can be found inside. Meanwhile, Federal Home Loan Mortgage Corp and Fannie Mae are among the larger issuers providing agency exposure.
CFRA also looks at the interest rate sensitivity of all bond ETFs it ranks. ISTB’s ranking is helped by its below-average duration of 2.7 years. This compares favorably to many other investment-grade bond ETFs, including iShares Core Aggregate Bond ETF (AGG) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) with average durations of 5.5 and 8.2 years. Despite rate hikes by the Federal Reserve in 2017, bond yields have not risen rapidly, and following the recent FOMC meeting, CFRA’s Investment Policy Committee meeting noted the odds for another rate hike in 2017 are reduced.
However, risks for higher yields in the future remain. For investors focused more on capital preservation and stable income over capital appreciation, such risks can be meaningful. ISTB has a 30-day SEC yield of 2.0%, which is lower than AGG and LQD, reflecting more muted interest rate risk.
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While the four inaugural bond ETFs continue to charge 15 basis points, still considerably cheaper than most active bond mutual funds, many younger products have launched with lower fees. Indeed, 44 bond ETFs charge a gross fee of 10 basis or less; indeed, ISTB costs just 8 basis points. In contrast, the average mutual fund in Lipper’s short investment grade bond peer group costs 75 basis points on average.
ISTB currently has no negative inputs at this point. For investors seeking a short-term bond ETF, we think ISTB is a strong candidate for a diversified portfolio.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.