Favor Credit Rates With These Investment-Grade Ideas | ETF Trends

With Treasury yields residing in territory that hardly make the asset class worth the trouble for advisors servicing income-seeking investors, investment-grade corporate bonds are taking on added importance in the income equation.

Advisors looking to up the level of customization they offer clients can enhance fixed income offerings via WisdomTree’s Modern Alpha Model Portfolios. The portfolios feature varying degrees of fixed income exposure comprised of both WisdomTree products and offerings from other sponsors.

The WisdomTree Fundamental U.S. Corporate Bond Fund (CBOE: WFIG) is an example of one of the high-grade corporate bond offerings found in some of the issuer’s model portfolios.

WFIG tracks the WisdomTree Fundamental U.S. Corporate Bond Index (WFCIG). That benchmark focuses on quality companies with attractive income potential. The benchmark’s methodology overtly dodges bonds that could become fallen angels – those going to junk from investment-grade.

“What’s going on in the U.S. corporate bond markets, you ask? Credit spreads continue to grind tighter despite the fact that the Federal Reserve (Fed) has not really turned on the spigots in its corporate bond-buying facility,” writes WisdomTree Head of Fixed Income Strategy in a recent note. “High yield spreads are now below the +500 basis points (bps) threshold, while for investment grade (IG), the differential is around +125 bps, representing an 83% and 90% retracement, respectively, from their March peaks.”

Shorter Duration Idea

Rate risk isn’t an imminent concern in the U.S. It probably won’t be several years, but for advisors looking for a short duration yield-generating idea with a strong credit profile, the WisdomTree Fundamental U.S. Short-Term Corporate Bond Fund (CBOE: SFIG) is a fund to consider.

WisdomTree has identified deteriorating cash flows, rising leverage and weakening profitability compared to peers as effective markers for potential credit concerns. WisdomTree believes eliminating these issuers can generate a considerable improvement in the strategy’s downside risk protection.

SFIG, which tracks the WisdomTree U.S. Short Term Corporate Bond Index, has an effective duration of just 2.34 years and a distribution yield of 2.14%, according to issuer data.

“In terms of fixed income asset allocations, WisdomTree believes the UST yield curve could steepen, and we position fixed income portfolios to over-weight U.S. credit over rates, while keeping duration shorter than the benchmark,” notes Flanagan.

For more on how to implement model portfolios, visit our Model Portfolio Channel.