BBB-rated corporate bonds are fixtures in a variety of actively managed funds and exchange traded funds. Why? Because that form of debt offers attractive yields while not residing in speculative territory.
However, BBB-graded corporates aren’t perfect. That’s an indication that advisors and investors need to be selective in how they gain exposure to this asset class. In the current environment, the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG) could be a prudent choice for market participants seeking BBB exposure while reducing some of the risks associated with those bonds.
MIG turned three years old in December. The fund tracks the MVIS® Moody’s Analytics® US Investment Grade Corporate Bond Index. That index choice is pertinent because the gauge attempts to identify attractively valued BBB-rated debt with reduced default risk.
MIG Ready for Primetime
Scores of corporate bond ETFs feature exposure to BBB debt. And when deployed properly, those bonds offer the potential for out-performance. For example, MIG returned 7.65% over the past year, or more than double the gain posted by the Markit iBoxx USD Liquid Investment Grade Index over the same period.
Still, there are some issues to consider with BBB corporates. Notably, these bonds, broadly speaking, are considered richly valued and the asset class has potential vulnerabilities to economic contraction. That says if the Federal Reserve cannot engineer an economic soft landing, BBB commercial paper could be punished.
“It’s possible that BBB valuations could stay rich for some time, especially if the Fed manages to pull off the elusive goal of a soft landing for the economy. Slipping into a recession, however, would likely cause pain for the economically sensitive lower tiers of the investment-grade corporate-bond universe, such as BBB rated issues,” noted Morningstar’s Eric Jacobson.
Like corporate bonds themselves, MIG isn’t perfect, but unlike many traditional rivals, the VanEck ETF follows an index that explicitly attempts to address the valuation and downgrade vulnerabilities associated with commercial debt with the lowest investment-grade ratings.
While not guarantees of upside or full downside protection, those traits are potentially advantageous for MIG investors. Plus, gaining access to those perks doesn’t require a lofty annual fee or sacrifice when it comes to income. That much is confirmed by MIG’s expense ratio of 0.20%, or $20 on a $10,000 investment, and an impressive 30-day SEC yield of 5.31%. That’s slightly ahead of the yield found on the Markit iBoxx USD Liquid Investment Grade Index.
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