A Factor-Based Strategy For Corporate Bonds

Smart beta and factor-based strategies are increasingly found in the world of fixed income exchange traded funds. That includes corporate bond funds, such as the iShares Edge Investment Grade Enhanced Bond ETF (Cboe: IGEB).

The Edge Investment Grade Enhanced Bond ETF tries to reflect the performance of the BlackRock Investment Grade Enhanced Bond Index, which is comprised of investment-grade corporate debt and screens out debt with the highest probability of default and then optimizes to improve risk-adjusted returns by weighting more heavily toward bonds with attractive default-adjusted spreads.

IGEB “combines quality and value, basically filters out the 20% of issuers from the market that have the highest probability of default, according to BlackRock’s proprietary model,” said Morningstar in a recent research note.

IGEB ETF Details

IGEB debuted in June 2017 and holds over 350 bonds. The fund has an effective duration of 6.92 years. Duration measures a bond’s sensitivity to changes in interest rates.

The Federal Reserve’s rising interest rates have been a main contributing factor in the downfall of investment-grade bonds this year. As the Fed hikes the short-term fed funds rate, longer-duration investment-grade bonds with historically low yields have appeared less attractive.