Investors looking for a basket of corporate debt issued by well-known companies feature a fairly diverse sector approach that may want to consider the ProShares S&P 500 Bond ETF (NYSEArca: SPXB).
SPXB seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
In what has been a trying environment for corporate bonds, SPXB’s quality purview is meaningful.
“There are other ways to lean toward higher-quality issues The ProShares S&P 500 Bond ETF SPXB takes an indirect approach,” said Morningstar analyst Neal Kosciulek in a recent note. “It tracks the S&P 500/MarketAxess Investment Grade Corporate Bond Index, which includes investment-grade U.S.-dollar-denominated bonds from publicly traded firms that are included in the S&P 500. Firms in the S&P 500 are typically large and have more resources to meet their obligations. Thus SPXB indirectly courts quality.”
SPXB only holds investment-grade debt. The smart beta indexing component is also incorporated in the screening process. From over 5,000 bonds issued by S&P 500 companies, the underlying index selects and weighs up to 1,000 of the most liquid investment-grade bonds based on several criteria.
“While SPXB’s portfolio strategy is market-value weighted, it does not simply select every bond issued by a company in the S&P 500,” notes Morningstar. “Rather, it selects the 1,000 most-liquid bonds, as determined by their recent trading volume. Although the focus on liquidity does not address credit risk specifically, it could protect the strategy against large drawdowns during credit risk periods. Liquidity tends to dry up when credit risk spikes, which can cause the price of less-liquid bonds to fall further and faster than relatively more liquid ones.”
Another benefit of SPXB is that it eschews highly speculative debt.
“SPXB has been consistently underweight the lowest-rated issues. As of May 2020, the fund’s exposure to these bonds was about 5 percentage points lower relative to the ICE Bank of America US Corporate Bond Index,” according to Morningstar.
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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.