Exchange-traded funds (ETFs) are not reserved solely for equities. There are also bond ETFs that invest exclusively in fixed-income securities. Investors who want to access relatively low risk corporate bonds can consider investment grade corporate bond ETFs, which buy the high-quality debt of financially strong and stable companies. Examples of the kinds of companies whose bonds are included in these ETFs include Verizon Communications Inc. (VZ), Goldman Sachs Group Inc. (GS), and Wells Fargo & Co. (WFC). These companies have high credit ratings, suggesting a low risk of default. For this reason, these ETFs can provide a strong defensive addition to investment portfolios.
- The investment grade corporate bond sector underperformed the broader market over the past year.
- The ETFs with the best 1-year trailing total return are LKOR, BSCR, and BSCQ.
- The top holdings for these funds are bonds of Wachovia Corp., Broadcom Corp., and Microsoft Corp., respectively.
The investment grade corporate bond ETF universe is comprised of about 62 distinct ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). As of February 9, 2021, the investment grade corporate bond sector, as measured by the benchmark S&P 500 Investment Grade Corporate Bond Index, has underperformed the broader market with a total return of 5.8% over the past 12 months compared to the S&P 500's total return of 19.7%. The best-performing investment grade corporate bond ETF for Q2 2021, based on performance over the past year, is the FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund (LKOR). We examine the top 3 best investment grade corporate bond ETFs below. All figures below are as of November 4, 2020.
- Performance over 1-Year: 8.1%
- Expense Ratio: 0.22%
- Annual Dividend Yield: 6.77%
- 3-Month Average Daily Volume: 5,668
- Assets Under Management: $54.6 million
- Inception Date: Sept. 23, 2015
- Issuer: FlexShares
LKOR is a fund which tracks the Northern Trust US Long Corporate Bond Quality Value Index. The custom index utilizes a methodology involving multiple factors to identify a portfolio of long-duration corporate bonds. These bonds carry maturities of 10 years or longer and are evaluated by measures including valuation, spread analysis, solvency, profitability, and management efficiency. The index also preserves diversification by limiting the weight of individual sectors, duration, issuers, and turnover. The fund has more than 300 holdings, of which the top holdings include bonds of: Wachovia Corp., a diversified financial services company acquired by Wells Fargo in 2008; Verizon Communications Inc. (VZ), the telecommunications and wireless company; and Charter Communications Operating LLC, a subsidiary of telecommunications service provider Charter Communications Inc. (CHTR).
- Performance over 1-Year: 7.4%
- Expense Ratio: 0.10%
- Annual Dividend Yield: 2.40%
- 3-Month Average Daily Volume: 66,679
- Assets Under Management: $294.1 million
- Inception Date: September 27, 2017
- Issuer: Invesco
BSCR targets the Nasdaq Bulletshares USD Corporate Bond 2027 Index. The index focuses on U.S. dollar-denominated, investment-grade corporate bonds that have effective maturities in 2027. BSCR does not strictly emulate the index and uses its own sampling methodology to select holdings, although it does invest at least 80% of its total assets in corporate bonds which comprise the index. BSCR includes a portfolio of about 280 corporate bonds. Its top holdings include bonds of: Broadcom Corp. (AVGO), a semiconductor manufacturer; Microsoft Corp. (MSFT), the software, cloud services, and consumer devices company; and Citigroup Inc. (C), the financial services firm.
- Performance over 1-Year: 7.1%
- Expense Ratio: 0.10%
- Annual Dividend Yield: 2.38%
- 3-Month Average Daily Volume: 106,825
- Assets Under Management: $395.3 million
- Inception Date: September 14, 2016
- Issuer: Invesco
BSCQ is structured nearly identically to BSCR above. However, it tracks the Nasdaq Bulletshares USD Corporate Bond 2026 Index, which focuses on corporate bonds with maturities or effective maturities in 2026. BSCQ uses a "sampling" methodology to achieve its investment objective and and does not buy all of the securities in the index. Nonetheless, its goal is still to invest at least 80% of its assets in corporate bonds that are part of the benchmark. BSCQ has about 275 holdings in its portfolio. The top holdings for this fund include bonds of: Microsoft; AbbVie Inc. (ABBV), the biopharmaceutical company; and bonds of Wells Fargo, the financial services company.
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