A recent spate of equity market volatility didn’t punish investment-grade corporate debt, highlighting benefits associated with the Principal Investment Grade Corporate Active ETF (NYSEArca: IG).
Actively managed, IG stood tall when volatility increased earlier this month, underscoring its status as an idea for income investors seeking stability.
“The first half of September was turbulent for U.S. equities, with the S&P 500 slumping from a record high before re-gathering momentum, but corporate bond markets largely maintained their serene progress even amid elevated issuance,” according to S&P Global Market Intelligence. “Between Aug. 31 and Sept. 14, the ICE Bank of America investment-grade corporate bond spread against the U.S. Treasury was unchanged at 136 basis points, remaining range-bound between 134 bps and 137 bps throughout.”
IG is an actively managed fund, a potentially beneficial trait at a time when demographic shifts could disrupt traditional corporate bond investing. 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.
“The high-yield corporate bond market was more volatile, with spreads widening from 502 bps on Aug. 31 to a peak of 525 bps at the close of Sept. 8, before dropping back to 518 bps on Sept. 14. However, the spread has reversed 77.9% of the widening experienced during the initial coronavirus market disruption in March, aided by a declining rate of defaults,” according to S&P Global.
IG combines bottom-up independent credit research with top-down strategy, seeking alpha through credit selection, industry rotation, and curve positioning and a forward-looking, iterative process seeks credits exhibiting stable-to-improving credit rating trajectory which may benefit from spread compression and income premiums, an approach that’s relevant in today’s corporate credit climate.
“The traditional technical ingredients for an outsized move in credit markets appear to be absent,” John Normand, cross-asset strategist at JPMorgan, wrote in a research note. “Recent dollar weakness hasn’t shaken out many overseas holders of U.S. corporate bonds, suggesting a foreign investor base that is pretty well hedged from a foreign exchange perspective.”
IG is flat over the past month and yields 3.42%.
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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.