Corporate Bond ETFs Revel in the Fed's Newfound Attention | ETF Trends

Corporate bond exchange traded funds were among the most popular ETF plays of the second quarter after the Federal Reserve embarked on an unprecedented corporate debt purchasing program.

Among the most popularly ETF picks of the past three months, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw $11.8 billion in net inflows, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) attracted $9.7 billion, iShares Short-Term Corporate Bond ETF (NasdaqGM: IGSB) added $3.9 billion and Vanguard Short-Term Corporate Bond ETF (VCSH) brought in $3.8 billion, according to ETFdb data.

As part of its efforts to support credit markets and bolster liquidity in the midst of the coronavirus pandemic, the Fed began purchasing corporate bonds and even corporate debt-related ETFs on May 12.

Consequently, the Federal Reserve is now the third-largest holder of the iShares iBoxx $ Investment Grade Corporate Bond ETF, owning over 13 million shares of the $54 billion ETF, Bloomberg reports. Only Bank of America Corp. and Fisher Asset Management owns more shares than the central bank.

The Fed is also the second- and fifth largest investor of the $29 billion Vanguard Short-Term Corporate Bond ETF and the $36 billion Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT), respectively.

“Now that they have SMCCF up and running, they will reduce their run rate on ETFs to make sure they have powder available in case they need it,” Peter Tchir, Academy’s head of macro strategy, told Bloomberg. “They will grow the bond side faster than the ETF side for now.”

However, not everyone is amenable to the idea of the Fed owning large chunks of the corporate bond market.

“It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed,” Kathy Jones, director of fixed income at Charles Schwab, told CNBC. “The reasoning I guess makes sense. But when you look at the outcome, you scratch your head and wonder whether this is where we need the money to go.”

So far, the Fed has only taken tentative steps into the corporate bond market. According to recent filings, the Fed owns nearly $430 million in individual bonds and $6.8 billion in ETFs. To put this in perspective, the corporate bond market is worth more than $10 trillion, and fixed income ETFs hold assets of $961 billion.

For more information on the fixed-income market, visit our bond ETFs category.