Fixed income ETFs are coming off a record of inflows in 2019 and with interest rates poised to remain low in 2020, advisors and investors are likely to continue allocating to bond ETFs. Popular destinations in the space include broad, cost-effective core concepts, such as the iShares Core Total USD Bond Market Index (NasdaqGM: IUSB).

IUSB seeks to track the investment results of the Bloomberg Barclays U.S. Universal Index. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates, as well as in securities not included in the underlying index, but which BFA believes will help the fund track the underlying index.

IUSB charges just 0.06% per year, or $6 on a $10,000 investment, making it one of the least expensive bond ETFs. With nearly 8,900 holdings, it’s also one of the largest. The $4.3 billion IUSB follows the Bloomberg Barclays U.S. Universal Index.

“The benchmark index represents a union of the Bloomberg Barclays U.S. Aggregate Bond Index (“the Agg”) with other sectors not represented in the Agg, like high-yield bonds,” said Morningstar in a recent note. “The additional sectors are small relative to those already contained in the Agg, so there is a large overlap between this fund and the Agg. The inclusion of corporate debt rated below investment-grade enables the fund to generate higher yields and hold on to bonds that are downgraded to junk from investment-grade (“fallen angels”), which may be temporarily undervalued because of concentrated selling pressure from investment-grade managers.”

Looking Inside IUSB

IUSB has an effective duration of 5.48 years and features minimal credit risk as the bulk of its holdings are U.S. government debt. As such, nearly 61% of the fund’s holdings have AAA ratings.

“This portfolio takes less credit risk than most of its peers in the core-plus bond category. AAA-rated debt represented 61% of this portfolio at the end of November 2019, 35% of which came from Treasuries. While the strategy’s corporate bond holdings matched the category average in terms of the total percentage of assets (both roughly at 33%), the fund held half as much of its assets in below-investment-grade corporate debt (roughly 7%). The fund was also 16 percentage points underweight in securitized debt, relative to the category average,” according to Morningstar.

The research firm upgraded IUSB to Gold from Silver.

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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.

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