Don't Sweat BBB-Rated Bonds or Related ETFs | ETF Trends

Heading into this year, there was plenty of chatter and concern about a potential raft of downgrades for BBB-rated corporate debt, or the corporate bonds with the lowest investment-grade ratings. Bonds with those ratings are one to three notches above junk territory.

However, some corporate bond exchange traded funds with significant BBB exposure are proving to be solid performers in 2019. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), the largest investment-grade corporate bond exchange traded fund, devotes about 51 percent of its weight to BBB-rated debt.

LQD seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk. LQD is higher by 3.55% in the first quarter.

“The investors who bought new BBB-rated bonds after the selloff were rewarded. Over the past month, the average newly issued BBB-rated bond’s spread has narrowed by 0.26 percentage points, far more than new bonds in other buckets. A-rated bonds, for example, have narrowed 0.14 percentage points,” reports Alexandra Scaggs for Barron’s.

Another Idea for BBB-rated debt

The ProShares Investment Grade—Intr Rt Hdgd (CBOE: IGHG) is up 4.09% this year. At the end of last year, that fund allocated more than half its weight to BBB-rated debt.

IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.

“BBB-rated bonds have rallied 4% so far this year, according to Bloomberg Barclays Indices. After those gains, it is tempting to think that the best of the rally is over, but valuations of higher-rated bonds have climbed as well,” according to Barron’s.

For more trends in fixed income, visit the Fixed Income Channel.