Exchange-traded funds (ETFs) are regarded for helping to inject liquidity into the bond markets and as such, the Federal Reserve is looking to snatch up these funds as opposed to actual debt issues. The Fed is planning to buy up to $100 billion in corporate debt, which should help fuel corporate bond ETFs.
“The past week’s raft of Federal Reserve stimulus measures had an unusual feature: The central bank will, for the first time, buy up to 20% of the assets of U.S.-listed exchange-traded funds that provide broad exposure to investment-grade bonds,” a Barron’s report noted. “DataTrek believes that ETF purchases may be a way for the Fed to support the banks. Nearly 26% of the iShares iBoxx $ Investment Grade Corporate Bond ETF is bank debt, notes DataTrek.”
One fund to take advantage of the Fed’s corporate bond-buying spree is the WisdomTree U.S. Corporate Bond Fund (BATS: WFIG). WFIG seeks to track the price and yield performance of the WisdomTree U.S. Corporate Bond Index, which is designed to capture the performance of selected issuers in the U.S. investment-grade corporate bond market that are deemed to have favorable fundamental and income characteristics.
A few other ETFs to consider:
- SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB): SPSB seeks to provide investment results that correlate with the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. Once again, O’Leary would benefit from the reduced exposure to volatility with SPSB’s investment in shorter-duration debt with maturities less than three years. In addition, SBSP minimizes credit risk by constructing a debt portfolio that contains only investment-grade bonds with companies that are less likely to default.
- ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG): IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index so it invests in long positions in USD-denominated investment grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasuries. O’Leary likes to minimize downside risk, so he would probably prefer a corporate bond ETF with a debt portfolio in investment-grade bonds, which is where IGHG invests 80% of its capital. Investment-grade allows investors to mitigate credit risk by allocating capital towards debt issues that are less likely to default versus less-than-investment-grade issues.
- Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH): VCSH tracks the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity–the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. VCSH debt holdings mirror those found within the index, so U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by the industrial, utility, and financial companies comprise the debt portfolio. Furthermore, in order to curb volatility in the bond markets, maturities are relatively short-duration issues–between 1 and 5 years until maturity.