Sometimes a new look can benefit exchange traded funds. Some market observers argue that is the case with the iShares Intermediate-Term Corporate Bond ETF (NASDAQ: IGIB), which earlier this year swapped indexes.
In August, the underlying index for the Fund changed from the Bloomberg Barclays U.S. 1-10 year Credit Index to the ICE BofAML 5-10 Year US Corporate Index, according to iShares.
“The fund’s new bogy is cleaner (it excludes supranationals, municipal bonds, and sovereign debt, which were included in its predecessor) and more modular (when considered in the context of its similarly recast sibling exchange-traded funds) than its prior one,” said Morningstar in a note out Wednesday.
After the downpour of volatility in October, investors may now be ready to seek refuge under the umbrella of investment-grade corporate bonds again. As a result, high yield has underperformed lately as investors flocked to the safer confines of investment-grade debt issues.
Inside IGIB ETF
The $5.59 billion IGIB holds almost 1,760 bonds and has an effective duration of 6.13 years. Over 93% of the fund’s holdings have maturities of five to seven years or seven to 10 years.
“Given its relatively longer duration, the fund’s new benchmark will be more sensitive to changes in interest rates than its former one and thus incrementally more volatile. From January 1977 through September 2018, the fund’s new index outpaced the corporate-bond Morningstar Category average and the Bloomberg Barclays Corporate Bond Index by 55 and 36 basis points annualized, respectively,” according to Morningstar.
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IGIB is lower by 1.62% year-to-date, due in large part to rising interest rates. The Federal Reserve’s rising interest rates have been a main contributing factor in the downfall of investment-grade bonds this year. As the Fed hikes the short-term fed funds rate, longer-duration investment-grade bonds with historically low yields have appeared less attractive.
“Investment-grade corporate-bond returns are primarily driven by interest rates because their default risk is low. But because they do introduce credit risk, they offer higher expected returns than Treasury bonds with comparable interest-rate risk,” according to Morningstar.
IGIB is one of the cheapest funds in its category with an annual fee of just 0.06%, or $6 on a $10,000 investment.
For more trends in fixed income, visit the Fixed Income Channel.