Investment-Grade Bond ETFs Appeal to Advisors

Even with uncertainty about whether the Federal Reserve will soon pause its rate hiking program, bond ETFs are in demand. Individual Treasury ETFs have the strongest net inflows, according to VettaFi LOGICLY data. Yet, advisors told VettaFi that they are looking to take on moderately more credit risk, according to our recent advisor survey. 

VettaFi asked: “Which fixed income style do you find appealing in the current environment?” in mid-May. Half of the respondents chose investment-grade corporate bonds, while 25% and 14% selected core/aggregate and ultra-short styles, respectively. Even given the option to select all that applied, only 7% and 4% of advisors chose high yield corporate or emerging market debt as being appealing. 

Many advisors think of investment-grade bond ETFs as index-based products owning bonds rated BBB or above. The most popular funds include the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), the Vanguard Short-Term Corporate Bond ETF (VCSH), and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). However, these three investment-grade heavyweights have incurred net redemptions this year. In contrast, some lesser-known ETFs have seen inflows and ma be poised for more. 

Investment-Grade Bond ETFs Can Be Smart Too 

In a recent video with fellow VettaFi Voice Dave Nadig, I made the case that there’s some interesting smart-beta bond ETFs. Some investors seem to agree with me. 

Unlike LQD, VCIT, and VCSH, which are weighted by debt issuance, smart-beta bond ETFs are index funds constructed based on fundamental or price-based metrics. For example, the iShares Investment Grade Bond Factor ETF (IGEB) is constructed by blending quality and value analytics. IGEB had net inflows of $65 million thus far in 2023. This pushed its asset base to $250 million. 

Another smart-beta ETF seeing some interest in 2023 is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB). GIGB’s $600 million asset base has expanded by $45 million thus far in 2023. GIGB is also different from issuer-weighted index-based products because the index construction process excludes issuers with low operating margins and high debt leverage. 

Should You Go Active for Investment-Grade Bond ETFs?

Investors have turned to active management for bond exposure in 2023, led by ultra-short and core/aggregate bond ETFs. However, some active investment-grade bond strategies also saw modest demand. The Principal Investment Grade ETF (IG) is one example.

IG’s assets doubled to $40 million this year. Unlike index-based ETFs, the management of this ETF sorts through the universe daily for attractive income opportunities and conducts proprietary credit analysis. 

According to VettaFi’s Explorer data, investors are highly engaged with broad-based corporate bond ETFs. Since mid-April, we have seen strong interest in the investment style relative to other U.S. fixed income alternatives. (Blue-green color second from the top.) Thankfully, investors have lots of choices to consider.  

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