Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy.
When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means a higher sensitivity to shifts in rates.
Investors looking for short-term credit ideas can consider the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ). CSJ tracks short-term U.S. investment-grade credit, including corporate, sovereign, supranational, local authority and non-U.S. agency bonds with remaining maturities between one and three years.
“Beginning no sooner than August 1, 2018, but no later than October 4, 2018, the fund will seek to track a new underlying index, the ICE BofAML 1-5 Year US Corporate Index, and will cease to track the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index,” according to iShares.
Calling On CSJ
The $10.59 billion CSJ, which debuted 11 and a half years ago, holds nearly 900 bonds. The fund has an effective duration of 1.95 years and a 30-day SEC yield of 3.07%. Over 94% of CSJ’s holdings have maturities of one to two years or two to three years.
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Potential investors should be aware that corporate bonds have historically exhibited grater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
“The selloff has taken the yield on corporate bonds above 4% for the first time since 2011. Company debt was previously buoyed by ultraloose monetary policy,” according to the Wall Street Journal. “Now the Federal Reserve is raising interest rates and starting to wind down its balance sheet. This brings companies into greater competition for dollar funding, especially with short-dated U.S. Treasury yields now at a 10-year high. Previously there was little alternative for yield-seeking investors but to buy riskier debt.”
CSJ is an investment-grade fund as over 71 percent of the ETF’s holdings are rated A or BBB. The ETF charges just 0.06% per year, or $6 on a $10,000 investment.
For more information on the fixed-income market, visit our bond ETFs category.