Amid Commotion, Some Short-Term Bond ETFs Still Merit Consideration

Once believed to be a refuge from volatility equity markets, the fixed income space is enduring pain at the hands of pricing dislocations and liquidity concerns. Bringing further stress to the corporate bond market are a slew of credit downgrades, creating a newly minted batch of fallen angles.

Those scenarios, among others, are weighing on ETFs, even those with short durations, such as the iShares Broad USD Investment Grade Corporate Bond ETF (NASDAQ: USIG). targets the ICE BofAML US Corporate Index and holds over 6,300 investment-grade corporate bonds, one of the largest rosters among funds in this category.

“I think this 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 analyst Alex Bryan of USIG 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.”

An Effective Duration

The $3.36 billion USIG has an effective duration of seven years, putting it in the intermediate-term territory. USIG has a 30-day SEC yield of 3.16% or more than triple what investors get on 10-year U.S. Treasuries. The weighted average maturity of USIG holdings is 10.55 years.

“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,” said Bryan.

The Federal Reserve has for the first time started buying corporate debt in an attempt to support credit markets. The central bank revealed it would launch two credit facilities to back corporate credit markets, a Primary Market Corporate Credit Facility for new bond and loan issuances and a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds, Forbes reports.

The Fed will focus on investment-grade U.S. company debt, and it will even purchase U.S.-listed exchange-traded funds that provide broad market exposure to U.S. investment-grade corporate bonds

“So, if you’re looking to get a slight yield pickup but you don’t want to venture out into high-yield territory, I think this is a really good way that you can get some additional yield without taking on a lot of risk,” adds Bryan.

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.

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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.