Rising interest rates are plaguing fixed income assets of nearly all stripes this year, but that slump could be unearthing value among corporate bonds and the related exchange traded funds.
On that note, the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) is a relevant consideration for investors looking for the elevated income offered by corporate bonds along with environmental, social, and governance (ESG) perks.
RBND follows the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index and holds 457 bonds. That’s a smaller lineup than investors find with traditional corporate bond ETFs, but that’s still a broad roster that underscores the notion that employing ESG principles can pare a portfolio. That can be to investors’ benefit with corporate bonds.
Year-to-date, corporate bond funds have been far from perfect, but there is some good news when looking beyond the apparent drag of rate risk. Corporate balance sheets, broadly speaking, are firm and default rates aren’t at alarming levels.
“Disciplined capital allocation, including higher-than-usual cash levels, has bolstered asset cushions. As a result, key credit metrics such as leverage, interest coverage, and earnings before interest, taxes, depreciation, and amortization (EBITDA) are in much better standing compared to 2020 levels,” according to Goldman Sachs research.
Though not at record lows, leverage ratios for investment-grade issuers –RBND’s area of emphasis – are at tolerable levels. Additionally, RBND could be primed for better things in the second half of 2022 because, at this point, hot inflation is baked into the prices of many assets.
“Soft landings are more common when long-run inflation expectations are well-anchored, and the private sector balance sheet is strong, but less common when inflation is high,” adds Goldman.
Some market observers believe trouble spots in the corporate bond space could emerge among cyclical companies with strained balance sheets. Some of those firms are already in junk territory, meaning RBND keeps investors clear of that potential storm. About 54% of the fund’s holdings are rated AAA, AA, or A, indicating strong credit quality potential when employing ESG, as does RBND.
“At the moment, we believe that the corporate credit market has the strength to persevere through ongoing market volatility and to provide solid risk-adjusted returns for investors,” concludes Goldman Sachs.
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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.