Investors Shouldn't Overlook Investment-Grade Bond ETFs

Investment-grade corporate bonds and related ETFs can provide a good mix of stability and income for investors seeking to still put money to work in an uncertain market environment.

“Rather than sit idle in cash, investment grade corporate bonds may offer a mix of stability and income to investors seeking to navigate the current market environment. Investment grade corporate bonds represent something of a middle ground for investors between riskier equities and perceived safe haven assets like Treasury bonds,” Karen Schenone, Fixed Income Product Strategist at BlackRock, said in a note.

Investment-grade corporate debt is typically less volatile than the the equity market. Over the past three years, total return volatility for U.S. investment grade corporate bonds was roughly 3.4%, compared to the total return volatility near 10% for U.S. stocks.

This segment of the bond market also typically experiences less credit risk as they are issued by high-quality companies with credit ratings between AAA and BBB-. Nevertheless, they do come with the potential to default so they offer a higher yield than similar maturity U.S. Treasuries.

Bond ETF Plays

Investors interested in the investment-grade corporate bond segment have a number of ways to access this market. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), the largest investment-grade corporate bond-related ETF on the market, has a 8.48 year effective duration and a 4.08% 30-day SEC yield.

Additionally, something like the iShares 0-5 Year Investment Grade Corporate Bond ETF (NasdaqGM: SLQD) can help investors target investment-grade corporate debt on the lower end of the yield curve in case they are concerned about rate risks. SLQD has a 2.35 year duration and a 3.23% 30-day SEC yield.

“Investors should think about their investment goals and time horizon when weighing the merits of investment grade corporate bonds. Dividing the corporate bond yield curve into distinct maturity segments, such as 1-5 years or 5-10 years, allows investors to target specific corporate bond maturity profiles depending on their needs, risk tolerance and investing horizons. Exchange traded funds (ETFs) allow investors to assemble customized investment grade corporate bond portfolios,” Schenone added.

For more information on the fixed-income market, visit our bond ETFs category.