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.
The $61.57 million IGEB also has some value characteristics.
“Then it leans into value with the remaining bonds in the universe,” said Morningstar. “Basically, it’s trying to maximize its default adjusted spread. It’s trying to adjust for the risk of default and then go after the bonds in the markets that have the highest spread relative to their default risk. I like this because in pursuing these value characteristics it’s trying to constrain the risk that it takes, both through the quality filters that it has in place, but also it has some additional constraints to limit how much interest-rate risk it can take or how much credit risk it can take.”
IGEB has an option adjusted spread of 122. Nearly 79% of the fund’s holdings are rated BBB.
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