With investors scrambling to find added yield on fixed-income investments, investment-grade corporate bond ETFs are luring more assets in today’s low-yield environment. A name to consider in that group, particularly for cost-conscious investors, is the iShares Broad USD Investment Grade Corporate Bond ETF (NASDAQ: USIG).
Formerly the iShares U.S. Credit Bond ETF (CRED), USIG now targets the ICE BofAML US Corporate Index and holds over 6,000 investment-grade corporate bonds, one of the largest rosters among funds in this category.
USIG has an effective duration of 7.35 years, putting it in intermediate-term territory. With Treasury yields declining and the Federal Reserve poised to lower interest rates again, perhaps this month, investors can consider taking on added duration risk.
The third quarter’s risk-off tone proved to be a boon for corporate bond funds. Consequently, investors were moving into corporate debt, arguing that they were balancing risk exposure through different assets. Corporate bonds generate more attractive yields than the sub-2% payout on most Treasuries and offer upside potential if the economy surprises the market.
USIG allocates 51.64% of its weight to BBB-rated bonds, a weight that’s mostly inline with the category average.
Heading into 2019, there were concerns that BBB-rated corporate bonds, debt residing within one to three notches of junk territory, were headed for a raft of downgrades. For most of this year, those concerns were allayed, but in recent weeks, bond markets have been pricing in some BBB troubles.
While the amount of corporate debt issued with BBB ratings has increased, credit spreads have not blown out, possibly indicating this corner of the corporate debt space isn’t as fragile as some investors have been led to believe.
USIG “is a really good option if you’re looking for a slight yield pickup over what the broad U.S. investment-grade market offers, but you want to keep risk in check,” said Morningstar in a recent note. “So, this particular fund invests in a broad range of investment-grade U.S. corporate debt, with bonds ranging anywhere from one year to maturity all the way up out the yield curve. This fund effectively diversifies issuer-specific risk, sector-specific risk, and I think this is a really good option to pair with a core bond holding.”
USIG charges just 0.06% per year, or $6 on a $10,000 investment, making it one of the least expensive ETFs in its respective category.
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.