Yields on corporate bonds, both investment-grade and junk, are low. So are default rates, and credit spreads are historically tight.
Put all that together, and it might be easy for an investor to assume that there’s not much value to be had with corporate debt. Fortunately, some exchange traded funds make finding that value easier. Enter the VanEck Vectors Moody’s Analytics IG Corporate Bond ETF (MIG) and the VanEck Vectors Moody’s Analytics BBB Corporate Bond ETF (MBBB).
MIG, which debuted last December, follows the MVIS® Moody’s Analytics® U.S. Investment Grade Corporate Bond Index. Both ETFs are departures from old guard corporate bond funds, which usually weight components by issue size, the fixed income ETF equivalent of cap weighting.
And as is the case with cap-weighted equity funds, bond ETFs following that methodology can expose investors to components that don’t fit the bill as value plays. However, while value is a familiar factor in the world of equities, it goes overlooked when it comes to bonds. As William Sokol, VanEck senior ETF product manager, notes, that shouldn’t be the case.
“Accurately assessing a bond’s fair value is key. While credit ratings can be an important source for determining the creditworthiness of a bond, there are many other factors investors should pay attention to,” Sokol explains in a recent note. “We believe that a forward-looking outlook based on market-based inputs such as a firm’s stock price can allow investors to identify bonds with attractive income and upside potential, while avoiding bonds that do not provide adequate compensation or may be at a high risk of being downgraded to high yield.”
MBBB tracks the MVIS® Moody’s Analytics® US BBB Corporate Bond Index and is an investment-grade fund, but its approach to credit is a departure from traditional funds in this space. Like its stablemate MIG, MBBB eschews issue size and instead focuses on bonds’ value traits and default probability.
As Sokol notes, there “is significant dispersion of credit risk pricing within the corporate bond market,” but many bond ETFs aren’t constructed to capitalize on those opportunities. MBBB and MIG, however, answer that bell.
“MIG and MBBB track indices based on credit metrics calculated by Moody’s Analytics’ CreditEdge® platform, which drives credit risk management at over 650 of the world’s largest institutions. The strategy targets the most attractively valued corporate bonds relative to their ‘Expected Default Frequency’ and seeks to provide investors with upside return potential while controlling for credit risk,” adds Sokol.
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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.