With the prospect of rate cuts this year, companies are feeling emboldened to issue new debt. As such, fixed income investors have myriad opportunities to get exposure via corporate bond ETFs.
As reported by Reuters, corporate bond issuance topped $45 billion to start the first trading week of 2024. The issuance comes after a strong jobs report could potentially cause the Federal Reserve to pivot from its proposed rate cuts in the new year.
The ‘January Effect’
“Companies are taking advantage of the ‘January effect’ as investors start to deploy fresh investment capital in the new year after the seasonally quiet back half of December,” said Scott Schulte, head of the investment-grade debt syndicate desk at Barclays. He added that a push “to get deals done early in the week is also motivated by the notion that the meaningful year-end decline in Treasury yields was arguably overdone. And key economic data releases later this week risk showing an inflationary surprise.”
Investors may want to get diversified corporate bond exposure via corporate bond ETFs. Vanguard has many options investors can use to tailor their exposure.
In terms of shortening duration, consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH). The fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
For intermediate duration, there’s the Vanguard Interim-Term Corporate Bond ETF (VCIT). It tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities between five and 10 years.
Yield seekers willing to accept the higher credit risk and rate risk associated with long-term bonds can take a look at the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). It tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. That index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities greater than 10 years.
Incorporating ESG With Corporate Bond ETFs
Fixed income investors who want to add an ESG component to their corporate bond exposure may want consider the Vanguard ESG U.S. Corporate Bond ETF (VCEB). It has a 30-day SEC yield of 5.35%. And its maturities are primarily in the intermediate range (6.8 years) and include investment-grade corporate debt.
VCEB seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index. That index excludes bonds with maturities of one year or less and with less than $750 million outstanding. It is screened for certain ESG criteria by the index provider, which is independent of Vanguard. It excludes bonds of companies that the index sponsor determines are involved in and/or derive threshold amounts of revenue from certain activities or business segments. Those include adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
For more news, information, and analysis, visit the Fixed Income Channel.