With interest rates at their highest levels in two decades and inflation still high enough that the possibility of further rate hikes isn’t off the table, advisors and investors should be judicious when examining fixed income exchange traded funds. That’s particularly true when it comes to corporate bond ETFs.
Yields are tempting on both investment-grade and junk-rated corporate bond ETFs. Obviously, the latter sport higher yields to compensate investors for the added risk. However, some market observers are encouraging investors to lean toward higher-quality options in the corporate bond arena. Enter the Vanguard ESG U.S. Corporate Bond ETF (VCEB).
VCEB follows the cap-weighted Bloomberg MSCI U.S. Corporate SRI Select Index and held 2,581 bonds as of the end of the second quarter. The ETF is an investment-grade option, and it leans into the higher quarterly side of that spectrum, as more than 58% of its holdings are rated AAA, AA, or A — a desirable trait in any market environment.
Why VCEB Matters Today
Many ordinary investors don’t get too deep into the weeds of the fixed income market, and that’s all right. However, those considering corporate bonds and the related ETFs should stay abreast of maturity scenarios. A wave of maturities is coming in the months ahead, and that highlights the advantages of higher-quality corporates, such as the bonds residing in VCEB.
“One such potential risk emanates from the rising wave of credit maturities from the corporate credit markets,” noted Vishy Tirupattur, Morgan Stanley’s chief fixed income strategist. “While company balance sheets, by and large, are in a good shape now, given how far interest rates have risen and how quickly they have done so, as that debt begins to mature and needs to be refinanced, it will happen at sharply higher rates. From now through the end of 2024, almost a trillion of corporate debt will mature. Simply by holding rates constant, that refinancing will represent a tightening of financial conditions.”
The good news is that most of the looming maturities pertain to bonds issued by investment-grade issuers that can service those obligations. VCEB benefits don’t end there.
As its name implies, the Vanguard ETF is an environmental, social, and governance (ESG) fund. The methodology employed by VCEB’s underlying index could be advantageous in terms of ESG controversy avoidance, which is meaningful because such events can sap an issuer’s share price and credit rating.
“The ESG controversies assessment measures a company’s involvement in major ESG controversies and how well they adhere to international norms and principles,” according to Vanguard.
For more news, information, and analysis, visit the Fixed Income Channel.