Corporate bonds and the related ETFs are getting plenty of attention this year as the Federal Reserve is putting billions of dollars to work to shore up that market, a trend propping up ETFs such as the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB).
GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.
The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.
GIGB “presents a more sophisticated approach to dialing back credit risk,” according to a recent Mornigstar note. “Rather than rely on credit rating agencies, the strategy cuts credit risk via its own fundamental screening process. In selecting bonds, it eliminates bonds issued by the 10% of issuers from each sector with the most unfavorable year-over-year changes in operating margins and leverage (the two measures are averaged).”
Going With GIGB
Bonds have definitely been having their day in the sun as numerous companies are taking advantage of low rates combined with the Federal Reserve’s support to backstop the bond market during the pandemic.
Credit for the turnaround for bonds goes to the central bank for stepping in as the lender of last resort to help fuel the bond market. The added flow of capital helps with bond pricing and it allows cash-strapped companies the opportunity to issue more debt to stay afloat.
GIGB “is a sensible approach, as bonds’ upside potential is limited relative to their downside. Also, the market is generally faster to respond to new information than credit rating agencies,” notes Morningstar. “Cueing off fundamentals as opposed for waiting for the rating agencies to act may give it an edge in weeding out weaker credits. But while the strategy should deliver performance that is consistent with the broad investment-grade corporate bond market, its screening approach won’t necessarily lead to better performance over the long run. Market prices should reflect the bonds’ risk. It isn’t clear that the market systematically overvalues bonds with deteriorating leverage and operating margins.”
Home to almost $507 million in assets under management, GIGB has a 30-day SEC yield of 2.32% and charges just 0.14% per year or $14 on a $10,000 investment.
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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.