Play the Hot then Cold Interest Rate Standoff with 'LQD'

As Treasury bond yields continue to tick higher, puts corporate bonds may be in a bind as fixed income investors increasingly opt for government bonds with less default risk. As the market continues to decide whether it wants to continue past its pre-pandemic levels or languish further, investors can get quality corporate bond exposure with assets like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

“If you thought the tug of war between optimism and pessimism would end in 2021, unfortunately, you were sorely mistaken,” a Forbes article said. “Every month in 2021 thus far has started off red hot and slowed down towards the middle due to some kind of tailwind.”

The biggest concern for bond investors is the threat of rising yields, and possibly inflation to follow. This sparked some sell-offs in equities earlier this year before rising ahead of first quarter earnings.

“April is one of, if not the best month for stocks historically, and the month has started off with the Dow and S&P hitting new records,” the article added. “However, there are still fears of inflation (yet the CPI came in tamer than expected), issues with the JnJ one-dose vaccine, and overvaluation concerns.”

LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index. The fund generally invests at least 90% of its assets in component securities of the underlying index and at least 95% of its assets in investment-grade corporate bonds.

The underlying index is designed to provide a broad representation of the U.S. dollar-denominated liquid investment-grade corporate bond market. LQD also comes with a low 0.14% expense ratio.

Overall, 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

Focusing on Quality Debt Issues

While the current environment may not be the most ideal to pick up corporate bonds strictly for yield only, investors can use LQD as a way to focus on quality debt issues. Furthermore, with a portfolio of over 1,000 bonds, LQD’s portfolio is well-diversified and minimizes concentration risk.

“We like national champions, sectoral leaders, companies with strong balance sheets and good quality management teams, plus good governance and flexible business models. We dislike those areas that are giving equity-like volatility for bond-like risk,” said Pictet Asset Management head of investment grade credit Jon Mawby in a Portfolio Adviser article.

For more news and information, visit the Equity ETF Channel.