Corporates Worth Considering in Second Half | ETF Trends

Both investment-grade and high yield corporate debt performed solidly in the first half of 2023. Broadly speaking, fixed income market observers believe that this trend will continue in the second half.

That’s good news for income-hungry investors and those looking to capitalize on a potential bond market resurgence. However, market participants’ selectivity regarding corporate bonds will remain crucial in the back half of the year. It’s possible that the Federal Reserve could resume boosting interest rates and with surprising intensity.

The Vanguard Short-Term Corporate Bond ETF (VCSH) could be one of the ideal corporate bond ETFs with which to survive the final six months of 2023. This period could potentially be a turbulent time for bonds.

One of the largest ETFs in this category, the $35.6 billion VCSH offers investors several benefits, including its focus on investment-grade bonds. That’s pertinent because some experts believe high yield corporates could encounter spells of elevated volatility in the second half.

Investment-Grade by Way of VCSH Could Be Solid Bet

It remains to be seen if the Fed hikes rates and/or if economic contraction arrives before the end of the year. However, if either or both of those scenarios materialize, high yield bonds would likely endure more punishment than VCSH holdings.

“For more conservative investors looking for income today, we prefer investment-grade-rated corporate bonds. For those investors who are willing to take more risk to earn higher yields, highly rated preferreds appear more attractive than high-yield bonds,” according to Charles Schwab research.

Although VCSH holds corporate bonds with quality ratings, investors buying the fund today don’t sacrifice yield to access that quality. VCSH sported a 30-day SEC yield of 5.33% as of June 22, according to issuer data.

“Investment-grade corporate bonds still appear attractive for investors looking to earn higher yields without taking too much additional risk. Yields generally remain near their highest levels since 2009, with the average yield-to-worst (the lowest possible yield that can be received on a bond with an early retirement provision) of the Bloomberg U.S. Corporate Bond Index closing at 5.5% on June 16th,” added Schwab.

Adding to the allure of VCSH are two points. First, investment-grade corporate bond yields are currently less inverted than their Treasury counterparts. Second, if a recession arrives in earnest, assets such as VCSH should prove more durable than junk bond equivalents.

Plus, the average duration on VCSH’s 2,453 components is just 2.7 years, implying that the ETF isn’t highly vulnerable to more rate hikes.

For more news, information, and analysis, visit the Fixed Income Channel.