In the fixed income space, the two primary risks confronting investors are credit risk and interest rate risk. The former can be amplified in the world of corporate credit and the latter can exacerbate those woes. For income investors, the good news is many ETFs provide access to the benefits of corporate bonds with diminished credit and rate risk. The WisdomTree U.S. Short Term Corporate Bond Fund (SFIG) merits a place in this conversation.
As its name implies, SFIG, which tracks the WisdomTree U.S. Short Term Corporate Bond Index, is a short-term fund. Its effective duration is 2.47 years. Typically, low duration bonds and funds don’t offer yields worth bragging about. But following extensive rate-tightening by the Federal Reserve, SFIG now sports a 30-day SEC yield of 4.76%.
Other Corporate Bond ETF SFIG Advantages
For bond investors, it’s not just SFIG’s low duration and impressive yield that are worth noting. The ETF only holds investment-grade debt, which is pertinent following elevated levels of default in 2023 and expectations of more of the same this year. Over 44% of SFIG’s holdings are rated AA or A.
Another point in favor of the ETF is that, as bond yields decline, so do yields on cash and money markets. While cash is a risk-free investment, its declining yields and lack of any capital appreciation potential could compel investors to leave money markets and embrace funds such as SFIG.
“In our view, slower primary market issuance and high inflows, particularly driven by domestic demand, should be supportive of US IG corporate bonds, even if the competition from still-high cash yields and other IG asset classes remains. In the coming quarters, cash yields are likely to fall, and other IG asset classes normalize,” according to BNP Paribas.
Broadly speaking, short-term corporate bond ETFs, including SFIG, typically don’t offer huge returns over shorter holding periods. For example, the nearly eight-year-old SFIG is higher by 4.72% over the past 12 months. Still, investment-grade corporate debt offers income investors some sources of allure.
“We believe the potential for capital appreciation is limited given the market’s strength in the final months of 2023 and the asset class’s relatively flat yield curve,” concluded BNP Paribas. “But, in our view, the carry in US IG is attractive enough. Yields have fallen from an October 2023 peak near 6.4% to around 5% at year-end, but remain high relative to their averages since the Global Financial Crisis.”
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