Investment-grade corporate bonds and the related exchange traded funds, broadly speaking, were solid performers in 2023 and through January. Those funds are sporting just modest losses, indicating the asset class could be ready for better things in 2024.
However, investors should consider the value of picky when it comes to corporate bond ETFs. The VanEck Moody’s Analytics IG Corporate Bond ETF (MIG) is an example of a fund that meets the demand of discerning fixed income investors. To start 2024, MIG is outperforming the widely observed Markit iBoxx USD Liquid Investment Grade Index.
With MIG, methodology matters. The VanEck ETF follows the MVIS® Moody’s Analytics® US Investment Grade Corporate Bond Index. The gauge is devoted to following attractively valued corporate bonds with reduced chances of being downgraded to junk status. In other words, MIG could be an ideal bond bet for highly selective investors.
Why MIG Matters Today
Amid expectations that the Federal Reserve could pare interest rates multiple times this year, some fixed income investors are renewing their animal spirits. That could encourage elevated risk-taking, including embracing riskier corporate debt.
However, some market observers believe default rates and downgrades could trend higher this year. Why? Because elevated borrowing costs pinch highly indebted borrowers. Those factors could highlight advantages with MIG as could the ETF’s exposure to debt issued by technology, media, and telecom (TMT) firms.
“There are a lot of opportunities in corporate credit in general,” noted David Hamburger, Head of U.S. Sector Corporate Credit Research and Lead Analyst for High Yield TMT at Morgan Stanley. “ And you know, people sometimes lose sight of the fact that there’s quite a diversity of investment opportunities. Whether you’re looking at many different sectors in energy, consumer retail or importantly, the TMT sector that we look at, and you can really find situations that suit your risk profile and how much risk appetite an investor might have.”
In bids to bolster research and development and forge into new markets, many TMT firms feasted on corporate debt when interest rates were low. With rates now high, bond investors must embrace issues from companies that can service outstanding obligations. MIG answers that call.
“I would say what really has defined the trend in the space, is those companies with strong balance sheets, financial flexibility, management teams that have remained nimble, have succeeded and thrive in this environment,” concluded Hamburger. “But on the contrary, companies that were extremely elevated amount of leverage on the balance sheet, found themselves with less financial flexibility to perform and compete. And we’re really seeing the fallout from that trend over the last two years.”
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