With a helping hand extended from the Federal Reserve amid the Covid-19 pandemic, corporate bonds got a nice boost as investors followed suit and piled more capital into debt issues. However, as 2020 comes to a close, bond investors should look towards more quality debt with a lesser likelihood of defaulting–an opportunity to take advantage of investment grade corporate bonds.

“U.S. companies sold more debt during the third quarter of 2020 than ever before, extending this year’s record-breaking bond bonanza into the second half of the year even as some analysts predict a slowdown,” a Wall Street Journal article noted. “Highly rated companies including Apple Inc. and Gilead Sciences Inc. issued more than $267 billion of bonds from July through September, according to data firm Dealogic. Below-investment-grade firms such as Charter Communications Inc. and Occidental Petroleum Corp. sold more than $119 billion. Those are both the largest amounts for that period in data going back to 1995.”

“The record-breaking third quarter surprised some on Wall Street. Many expected corporate-debt sales to slow in the second half of the year, after U.S. companies sold a record $822 billion of bonds in 2020’s first six months,” the article added.

With more uncertainty ahead, bond investors can look to funds holding quality debt like the iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD). 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. Furthermore, LQD gives bond investors:

  1. Exposure to a broad range of U.S. investment grade corporate bonds
  2. Access to 1000+ high quality corporate bonds in a single fund
  3. Use to seek stability and pursue income

LQD Chart

LQD data by YCharts

Here are a pair of other investment grade bond options to consider:

  1. ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG): 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.
  2. Xtrackers Inv Grd Bd Intst Rt Hdg ETF (BATS: IGIH): IGIH seeks investment results that track the performance of the Solactive Investment Grade Bond – Interest Rate Hedged Index where a portion IGIH’s total assets will reside in long positions in U.S. dollar-denominated investment-grade corporate bonds. As in the case of IGHG, this strategy effectively eliminates exposure to riskier bonds with fund allocations in investment-grade issues.

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