Investment-grade corporate bonds aren’t doing much to foster confidence among investors this year. For example, the widely followed Markit iBoxx USD Liquid Investment Grade Index is off 5.18% year-to-date, adding another layer of frustration to the 2021 fixed income market.
However, 2022 could bring better things with investment-grade corporates, particularly if downgrades and defaults remains low. An idea to consider is the WisdomTree U.S. Corporate Bond Fund (CBOE: WFIG). WFIG tracks the WisdomTree U.S. Corporate Bond Index.
WFIG’s methodology is relevant at a time when experts are advising investors to not bank on capital appreciation from corporate bonds in 2022 and to focus on coupon income instead.
“While the returns varied, there was one common denominator: Coupon income was the main driver of total returns, not price appreciation. We expect that trend to continue in 2022,” says Collin Martin of Charles Schwab.
While the assertion that corporate bonds’ price appreciation might leave something to be desired next year could prove accurate, that actually highlights the allure of WFIG because the WisdomTree U.S. Corporate Bond Index looks for valuation opportunities, which could put investors in a position to capitalize on some bonds that are undervalued today.
Even if there are modest price declines, the WFIG case isn’t out the window. The WisdomTree ETF has quality tendencies and is beating the aforementioned Markit iBoxx USD Liquid Investment Grade Index by more than 40 basis points year-to-date.
“The prospect of modest price declines doesn’t mean investors need to shun corporate bond investments as we approach the start of a new year, however,” adds Martin. “We suggest investors take a more cautious approach and not overweight any of the riskier parts of the market, while focusing on short- and intermediate-term maturities in the investment-grade corporate bond market to help limit the interest rate risk.”
As for coupon income, WFIG checks that box because the fund’s index, more so than traditional rivals, is able to identify corporate bonds with favorable income characteristics. That’s something to consider at a time when income is hard to come by.
Federal Reserve policy “makes us a bit more cautious about lower-rated investments like high-yield bonds and bank loans, but investors can still consider them in moderation. More importantly, if rates rise in 2022 as we expect, it should provide investors an opportunity to lock in higher yields than they’ve seen in over a year,” notes Schwab’s Martin.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.