Momentum Is on the Side of Corporate Bonds Right Now

Just ahead of Memorial Day weekend, corporate bonds finished another strong week as investor optimism erred on the side of bullishness that the government will do what’s necessary in order to stave off a recession. The Federal Reserve has already started to purchase corporate bond funds in response to the negative effects the pandemic has been having on businesses.

Per a Wall Street Journal report, the latest actions “by the Fed have played a major role in lifting corporate bonds, many investors and analysts say. Data released by the central bank late Thursday indicated it bought around $1.5 billion of corporate-bond ETFs in the week ended Wednesday. That brought its total holdings to $1.8 billion after it started buying the securities early last week.”

“Perhaps inspired by the Fed, individual Investors also have been pouring money into bond funds,” the report added. “Net inflows into high-yield funds totaled $1.6 billion in the week ended Wednesday, bringing the three-week total to nearly $10 billion, according to Refinitiv Lipper.”

“If you’re insuring too much against the massive amount of uncertainty ahead of us, you’re just falling farther and farther behind in this rally,” said Bill Zox, a portfolio manager at Diamond Hill Capital Management.

For investors looking to get in on the corporate bond rally can look to investment grade options in exchange-traded funds (ETFs). ETFs in this category include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).

Another option is the ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG). IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index so it invests in long positions in USD-denominated investment-grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasuries.

More Access to Corporate Bonds

With the Federal Reserve stepping in to purchase corporate bonds to help keep the economy afloat, one ETF to consider is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB). GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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