It’s hard not to notice the market hype around investment-grade corporates right now — at 5% yield, IG bond yields are the highest since the global financial crisis, with flows into IG corporate bond ETFs hitting a record in January. But in all that excitement, investors may be missing some key information.
According to Richard Bernstein Advisors (RBA) in a piece titled “The credit hype machine is going to break,” while the appeal of investment-grade corporate bond ETFs makes some sense with many IG companies having extended debt maturities at low fixed interest rates, low-quality credit does not perform well in earnings recessions. At the same time, the investment-grade market’s weight in BBB-rated bonds, the lowest-quality IG rating, is near a record at 50%.
Taken together, those factors invite investors to consider alternatives to investment-grade bond yields, like two-year Treasury yields. The two-year Treasury note is available right now with “virtually no credit risk” and very little risk of downgrades for just 60 basis points fewer in yield.
The firm’s point towards whether or not an earnings recession is priced in by credit markets speaks to its focus on the profits cycle, using metrics including profits, liquidity, and sentiment to invest according to accelerating or decelerating profits. Using key indicators and in-house qualitative and quantitative research and models, the firm looks to identify the ups and downs of the profit cycle.
That’s the same approach that undergirds its multi-asset approach, able to go to asset classes that perform in either profits upswings or downswings by moving from sector to sector, with a great example of the approach to be found in the iMGP RBA Responsible Global Allocation ETF (IRBA).
IRBA charges 69 basis points for its active approach and addition of a sustainable investing screen, having outperformed its ETF Database category average and its FactSet segment average over three months by 90 basis points and 135 basis points, respectively. The shop’s offerings also include ETF managed strategies which exclusively use ETFs that are “X-rayed” to identify the appropriate holdings, like the Global Equity ETF Strategy and the Global Risk-Balanced Moderate ETF Strategy.
Investors have been intrigued by the prospect of investment-grade corporates so far this year, and for good reason — but some skepticism may be warranted. There is certainly yield to be found across asset classes right now, and that may merit attention for a strategy like IRBA, which leverages RBA’s profit cycle research, in the weeks and months ahead.
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