For Patient Investors, Corporate Bond ETFs Could Pay Off in 2023

Following one of the worst years on record for the fixed income market, bond ETFs are offering investors a variety of potential rebound opportunities in 2023.

Corporate bonds of varying credit qualities and durations are part of that opportunity set, indicating that income-starved investors may want to evaluate exchange traded funds such as the VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB).

MBBB, which follows the MVIS® Moody’s Analytics® US BBB Corporate Bond Index, turned two years old earlier this month and could be a pertinent idea for bond investors in 2023 because it sports a tidy 30-day SEC yield of 5.55% and is flush with rebound potential due to the repudiation of corporate debt this year amid seven interest rate hikes by the Federal Reserve. The key to success in 2023 with ETFs such as MBBB is investors exercising patience if they decide to allocate capital to these funds.

“Over the next few months, the corporate bond market may encounter some choppy waters, but we expect seas to be calmer thereafter. For investors that can ride out a potential short-term squall, we find value in the credit spread and high all-in yields that corporate bonds, especially high-yield bonds, provides,” noted Morningstar analyst Dave Sekera.

For its part, MBBB holds 172 bonds from the BBB universe that carry a combination of attractive valuations and lower risk of being downgraded to junk territory. Nearly 16.6% of MBBB’s holdings are rated BB, which is high yield. That enhances the ETF’s income proposition, but not at the expense of exposing investors to excessive risk.

“The combination of higher interest rates and wider credit spreads has significantly boosted the yield for both investment-grade and high-yield bonds. After hitting all-time lows in 2021, interest rates on corporate bonds have risen well above their 10-year averages. The yield on the Morningstar US Corporate Bond Index is 5.16%, and the yield of the Morningstar High-Yield Bond Index is 8.27%,” added Sekera.

MBBB’s credit profile is relevant for another reason. While some market observers are bullish on the prospects of a corporate bond resurgence in 2023, they’re careful to note that investors should favor investment-grade fare over junk bonds. This is because a growing number of banks and economists are forecasting the arrival of a recession in 2023.

Should that scenario materialize, it could cause default rates and credit downgrades to rise, and it’s reasonable to surmise that the bulk of that negative action would be concentrated in the high yield space, which MBBB largely avoids.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.