Risks Facing Corporate Bond ETFs | ETF Trends

An often discussed topic among corporate bond investors last year was what would become of BBB-rated investment-grade debt in 2019. Bonds with BBB ratings are one to three notches away from junk status and BBB-rated debt accounts for a significant percentage of the U.S. corporate bond market.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), the largest investment-grade corporate bond exchange traded fund, devotes about 51 percent of its weight to BBB-rated debt.

LQD seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.

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. LQD is also a favorite among institutional investors.

BBB Risks

Historically, investment-grade corporates with BBB ratings perform relative to other corners of the corporate bond market, but those bonds delivered losses last year, heightening concerns about fragile grasps on investment-grade ratings heading into 2019.