Fully funded pension funds could be coming for corporate bonds, which puts assets like the Vanguard Total Corporate Bond ETF ETF Shares (VTC) in the spotlight.

Pension funds have been reaping the rewards of a re-strengthening market following last year’s pandemic scare. Now that funds are closing in on maximum gains, they may be shedding equities and adding corporate bonds.

“A ‘massive rotation’ into corporate bonds from equities may be on the horizon for U.S. pension funds as they become fully funded, according to strategists at Bank of America Corp,” a Bloomberg article explained. “Investment gains boosted the funded ratio of the 100 largest corporate plans to 98.8% in May, according to Milliman.”

An additional push towards corporate bonds could be raising rates, which the capital markets expects in an improving economy. Sooner or the later, the Federal Reserve will have to back off its steady stance.

 “I think this becomes a pretty big story, and it becomes a support for credit spreads in the back end of the curve especially,” Hans Mikkelsen, BofA’s head of high-grade credit strategy, said in an interview.

As for VTC, the fund seeks to track the performance of a broad, market-weighted corporate bond index. The fund is a fund of funds, and employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market.

The index includes U.S. dollar-denominated securities that are publicly issued by industrial, utility, and financial issuers. The fund comes with a low expense ratio of 0.05%.

VTC offers:

  1. Performance tied to the Bloomberg Barclays U.S. Corporate Bond Index
  2. Broad, diversified exposure to the investment-grade U.S. corporate bond market
  3. A unique ETF of ETF structure
  4. An intermediate-duration portfolio, with exposure to short-, intermediate-, and long-term maturities
  5. Current income with high credit quality

VTC Chart

De-Risking with Corporate Bonds

The Bloomberg article noted that pension funds that reach fully funded capacity could be selling off risky equities and then buying annuities from companies. In turn, insurance companies would hedge using investment-grade corporate bonds on the long end of the yield curve.

“These are legacy plans. It’s been a headache for a long time for companies to have them and have them be underfunded,” Mikkelsen said. “Now they may be able to make that problem go away without putting any new money into it.”

As Pension Funds Eye Corporate Bonds, Get Exposure With "VTC" 1

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