Market volatility saw investors seek the safe confines of government debt during the summer, which saw yields fall while bond prices climbed. Corporate bonds were an option for investors seeking yield in 2019, but will 2020 bring a down year for corporate debt?
The ProShares S&P 500 Bond ETF (NYSEArca: SPXB) has been a solid performer among corporate bond ETFs over the past year, delivering a double-digit return over that period, but the fund could be poised for another impressive showing in 2020.
SPXB seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means a higher sensitivity to shifts in rates.
More Quality Offers
With its focus on debt issued by S&P 500 member firms, SPXB can offer fixed-income investors more quality than competing corporate bond strategies. SPXB, which holds 1,000 issues from 92 issuers, has an effective duration of 8.21 years and allocates over half its weight to bonds in the BBB spectrum, but the bulk of those holdings are rated BBB+ or BBB.
SPXB only holds investment-grade debt. The smart beta indexing component is also incorporated in the screening process. From over 5,000 bonds issued by S&P 500 companies, the underlying index selects and weighs up to 1,000 of the most liquid investment-grade bonds based on several criteria.
“Corporate bonds were positive for the quarter as they benefited from tightening credit spreads. Spreads indicate the yield premium a corporation pays on its debt versus a Treasury bond of the same maturity,” said ProShares investment strategy analyst Daniel Busch in a recent note. “They are often impacted by confidence in the issuer’s ability to pay back its debt and thus the outlook for the economy— and the Goldilocks economy clearly boosted this confidence. Aligned with our view of equity markets, the trends of rising Treasury yields and tightening credit spreads may continue in 2020.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.