Give This ETF a Look as Institutional Demand for Corporate Bonds Rises

Institutional investors like mutual funds and insurance companies are piling onto corporate bonds, causing yields to slide. Retail investors aren’t left in the cold and can get exposure with the Vanguard Total Corporate Bond ETF ETF Shares (VTC).

“Yields on corporate bonds eased marginally in a week across tenors due to a strong appetite from mutual funds and insurance companies,” a Financial Express article said. “Additionally, banks have also been buying these papers in the secondary market due to the surplus liquidity in the banking system.”

In the current low-yield environment, corporate bonds can give fixed income investors more yield in lieu of more credit risk versus government debt. It appears that pension funds and insurance companies are preferring longer-duration bonds, while mutual funds are purchasing shorter-duration bonds.

“As we see, the stability in markets and flows in mutual funds and insurance, it’s a demand-led recovery in corporate bonds. People so far were sitting on the sidelines, but now have started making investments. G-Sec yields also stabilized and the last couple of auctions sailed smoothly without any devolvement and lower underwriting fee, sensing demand-led recovery,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.

Inflation fears have provided headwinds for the markets this year, but recent economic data in August showed that prices have cooled. As such, a return back to bonds resulted.

“Inflation momentum has softened significantly over the past two months. The latest CPI print was 30-40 basis points below the Street’s expectation. Softening inflation momentum should ease some pressure on the RBI and the pace of normalisation could be much slower than what was anticipated 2-3 months back,” said Pankaj Pathak, fund manager, fixed income, at Quantum Asset Management.

An All-Encompassing Corporate Bond Option

As for VTC, the fund seeks to track the performance of a broad, market-weighted corporate bond index. VTC is a fund of funds, and it 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:

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

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