Corporate bonds, both investment-grade and junk, are leading corners of the fixed income market to start 2019. The ProShares S&P 500 Bond ETF (NYSEARCA: SPXB) is one of the exchange traded funds participating in that rally.
SPXB, the first ETF dedicated to corporate bonds issued by S&P 500 member firms, is up 2.52% year-to-date. The fund tracks the S&P 500/MarketAxess Investment Grade Corporate Bond Index.
“SPXB’s index selects bonds from S&P 500 companies. The selected bonds have stronger credit quality than the broader U.S. corporate bond landscape,” according to ProShares. “The index seeks to select the most liquid investment grade bonds from companies in the S&P 500.”
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 weights up to 1,000 of the most liquid investment grade bonds based on a number of criteria.
“Demand for U.S. corporate bonds has surged after the Federal Reserve signaled that it’s done raising interest rates for now and eased investor concerns that rate hikes will choke off economic growth and crimp profits,” reports Bloomberg.
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SPXB has additional screening requirements to take note of. Qualifying debt securities must be issued by S&P 500 companies, be rated investment grade, be issued in the United States and denominated in U.S. dollars, have a remaining maturity of greater than or equal to one year, have a maturity upon issuance of at least two and a half years, and have a minimum par amount of $750 million.
Some economic data points support upside for corporate bonds this year.
“U.S. manufacturing was unexpectedly strong in January, and employer hiring last month jumped by the most in almost a year,” according to Bloomberg. “Any signs of slowing growth could keep the Fed at bay even as earnings stay relatively strong, in a replay of the post-crisis, bad-news-is-good-news investing strategy.”
SPXB’s 30-day SEC yield of 4.10% is about 55 basis points above the yield on the widely followed Markit iBoxx USD Liquid Investment Grade Index. As of the end of 2018, about 47% of SPXB’s holdings were rated between AAA and A-. The fund’s effective duration is 7.37 years.
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