By Todd Rosenbluth, CFRA
With $58 billion of net inflows in the first nine months, demand for US fixed income ETFs has remained strong in 2018 even as the Federal Reserve further raised interest rates. Yet, such demand has led to persistent concerns that investors can be harmed.
Heather Brownlie, US Head of BlackRock’s Fixed Income iShares, explained exclusively to CFRA in a video that the bond ETF market is a tiny (less than 1.5%) fraction of the total U.S. debt market and she consistently sees investors looking to the ETF for price discovery and to access liquidity.
Responding to a common concern that index-based ETFs are loaded up on the most indebted companies, Brownlie explained to us that investors need to be careful to understand that more debt does not mean higher risk. For example, the largest debt issuers in iShares iBoxx Investment Grade Corporate Bond ETF (LQD) also have the strongest balance sheets with the most asset behind them. According to CFRA, AT&T, Goldman Sachs and JPMorgan are some of the larger issuers in LQD. To watch the CFRA video on understanding the potential risks with bond ETFs, click here.
Meanwhile we acknowledge credit risks remain prevalent, but the 61 global corporate defaults year-to-date tallied by S&P Global Ratings are lower than in recent years. According to CFRA Research, iShares iBoxx High Yield Corporate Bond ETF (HYG), and high-yield ETF peer SPDR Bloomberg Barclays High Yield Bond (JNK) provided similar credit exposure, with approximately 47% of assets rated BB and 5% rated BBB.
However, there are other ways to gain high-yield exposure. For example iShares Edge High Yield Defensive Bond (HYDB) screens based on quality and value factors, more common in the smart-beta equity ETF world. HYDB launched in 2017 and has just $17 million in assets, considerably less than HYG and JNK.
In rating fixed income ETFs, CFRA combines this holdings-level analysis with fund attributes including the ETF’s liquidity, expense ratio and bid/ask spread. Reports can be found on MarketScope Advisor.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.