Many investors and advisors believe investment-grade U.S. corporate bonds should hold a core position in long-term, buy-and-hold portfolios.
This asset class has the potential to offer a significant yield upgrade from Treasuries without exposing investors to the risk that often accompanies high yield bonds. While corporate debt is often included in total bond market ETFs, allocations are often small. Thus, the Invesco Fundamental Investment Grade Corporate Bond ETF (PFIG) might make sense as a complementary addition to long-term portfolios.
“PFIG’s focus on high-quality issuers with a greater capacity for debt servicing makes it stand out relative to traditional issuer-weighted index-based corporate bond ETFs,” Todd Rosenbluth, head of research at VettaFi, said.
PFIG distinguishes itself from other products in the Corporate Bonds Category by the weighting methodology employed by the underlying index. Most bond ETFs are linked to cap weighted indexes that give the largest allocations to the biggest issuers of debt – and the most expensive securities. That approach has multiple potential drawbacks, including the tendency to overweight overvalued securities, according to VettaFi.
PFIG offers an alternative to cap weighted bond ETFs that may have appeal to investors looking to break the link between security weightings and the level of debt maintained. PFIG is instead constructed with the goal of giving the largest weightings to the companies with the greatest ability to service their debt. This is accomplished by scoring issuers based on four fundamental measures of size, including dividends and cash flow. The result is a portfolio that is similar to more popular products, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), but backed by a more sound construction methodology.
One potential drawback of PFIG is the slightly above average expense ratio; PFIG charges 22 basis points compared to LQD’s expense ratio of 14 basis points. However, the additional fee is well worth the exposure to the superior methodology, according to VettaFi.
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