Inflows to fixed income exchange traded funds are soaring this year and the Federal Reserve’s pledge to provide some ballast to the investment-grade and high-yield corporate bonds markets is a big reason why.
Perhaps the central bank should consider the actively managed Principal Investment Grade Corporate Active ETF (NYSEArca: IG). The Federal Reserve has already started to purchase corporate bond funds in response to the negative effects the pandemic has been having on businesses.
“The Fund strives to outperform its benchmark, the Bloomberg Barclays U.S. Corporate Investment Grade Bond Index, over a full market cycle. The Fund seeks to provide current income and, as a secondary objective, capital appreciation by investing in primarily investment-grade corporate bonds,” according to Principal.
IG may include global exposures as its pool of fixed income securities covers foreign securities, corporate securities, securities issued or guaranteed by the U.S. government or its agencies and instrumentalities, and securities issued or guaranteed by foreign governments payable in U.S. dollars. Additionally, it may invest in other investment companies, including exchange-traded funds that invest in fixed income securities.
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.
Meanwhile, the Fed’s holdings of ETFs that invest in corporate bonds rose by $1.3 billion to $3.1 billion for the asset category, according to adjusted figures. The corporate bond ETF purchases are part of the Fed’s broader plan to support the secondary market for corporate debt, and it is only getting started. A second facility for purchasing corporate debt directly from issuers has yet to be implemented.
IG tries to provide current income and capital appreciation by investing in investment-grade corporate bonds rated BBB- or higher by S&P Global Ratings or Baa3 or higher by Moody’s Investors Service.
With an annual fee of just 0.26%, or $26 on a $10,000 investment, IG is attractively priced relative to active mutual funds in this category.
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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.