Consider a Complete Corporate Bond ETF for Investment-Grade Exposure

Investors looking for income often turn to investment-grade corporate bonds and broad, cost-effective ETFs are solid avenues for gaining that exposure. The iShares Broad USD Investment Grade Corporate Bond ETF (USIG) checks those boxes.

The $4.74 billion USIG follows the ICE BofAML US Corporate Index and holds nearly 6,800 bonds, giving it one of the deepest benches in the investment-grade corporate bond fund category.

“A passively managed, market-value-weighted index fund is a sound approach for exposure to the investment-grade corporate-bond market,” said Morningstar analyst Neal Kosciulek in a recent note. “It ensures that the fund accurately captures the risk and return characteristics of its opportunity set by free-riding the market’s collective wisdom to determine the relative value of each of its holdings. There is less room for active managers to find an informational edge here than in the high-yield bond market because the market knows with greater certainty what investment-grade bonds’ future cash flows will be.”

Under USIG’s Hood

USIG has an effective duration of 7.91 years, putting it in intermediate-term territory. The Federal Reserve has been slowly deploying some of its monetary tools available to support the fixed-income markets, including exposure to corporate debt for the first time ever, and bond ETF investors are following suit.

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.

The Fed backstop is meaningful for USIG.

“Although the fund limits its exposure to investment-grade-rated debt, it courts a fair amount of credit risk. As of June 2020, 90% of its assets were rated BBB or A,” according to Morningstar. “While this does leave the portfolio susceptible to losses when credit spreads widen, it is an accurate reflection of the composition of the investment-grade corporate-bond market.”

USIG’s annual expense ratio of 0.06% per year, or $6 on a $10,000 investment, makes it one of the most cost-effective funds in the category and appealing to cost-conscious long-term investors.

For more on income strategies, visit our Retirement Income Channel.

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.