This Morningstar Silver-Rated ETF Provides Corporate Bond Exposure

The Federal Reserve did wonders for the bond market when it decided to purchase corporate bond ETFs and then, later on, individual issues. Moving forward as global economies look to reopen, investors can still get corporate bond exposure via the iShares Broad USD Investment Grade Corporate Bond ETF (USIG).

USIG seeks to track the investment results of the ICE BofAML US Corporate Index. The fund generally invests at least 90% of its assets in securities of the underlying index.

It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index. The underlying index measures the performance of investment-grade corporate bonds of both U.S. and non-U.S. issuers that are U.S. dollar-denominated and publicly issued in the U.S. domestic market.

“This portfolio replicates the composition of the U.S.-dollar-denominated, investment-grade corporate-bond market, effectively harnessing the market’s collective wisdom about the relative value of each bond,” a Morningstar article said. “This is a sound approach because it is cost-effective and promotes low turnover, and also because the market does a decent job pricing these bonds. It earns an Above Average Process Pillar rating.”

Much been said in the active versus passive debate when it comes to assessing the performance of both. In this case, a passive approach works just fine whilst keeping the cost down with a low expense ratio of 0.06%.

“A passively managed, market-value-weighted index fund is a sound approach for exposure to the investment-grade corporate-bond market,” the Morningstar article noted. “It ensures that the fund accurately captures the risk and return characteristics of its opportunity set by free-riding the market’s collective wisdom to determine the relative value of each of its holdings. There is less room for active managers to find an informational edge here than in the high-yield bond market because the market knows with greater certainty what investment-grade bonds’ future cash flows will be.”

Because it primarily focuses on investment-grade debt, that doesn’t mean USIG doesn’t venture out into riskier territory.

“Although the fund limits its exposure to investment-grade-rated debt, it courts a fair amount credit risk,” the article noted. “As of June 2020, 90% of its assets were rated BBB or A. While this does leave the portfolio susceptible to losses when credit spreads widen, it is an accurate reflection of the composition of the investment-grade corporate-bond market. For instance, while the strategy fell by 12.67% between Feb. 19, 2020, and March 23, 2020, the peak-to-trough period of the coronavirus crisis, the average fund in the corporate-bond category fell by 12.60%.”

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