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.

Key Takeaways

  • The investment grade corporate bond sector underperformed the broad U.S. equity market over the past year.
  • The best investment grade corporate bond ETFs for Q4 2021 are IGBH, IGHG, and LQDH.
  • The top holdings of these ETFs are shares of the iShares 10+ Year Investment Grade Corporate Bond ETF, bonds issued by Goldman Sachs Group Inc., and shares of the iShares iBoxx $ Investment Grade Corporate Bond ETF, respectively.

There are 63 distinct investment grade corporate bond 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).

The investment grade corporate bond sector, as measured by the Bloomberg Barclays U.S. Corporate Bond Index, has significantly underperformed the broad U.S. equity market over the past 12 months, with a total return of 1.8% compared to the S&P 500's total return of 36.3%, as of Aug. 3, 2021. The best-performing investment grade corporate bond ETF for Q4 2021, based on performance over the past year, is the iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH). We examine the three best investment grade corporate bond ETFs below. All numbers are as of Aug. 3, 2021.

iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH)

  • Performance over One-Year: 10.3%
  • Expense Ratio: 0.16%
  • Annual Dividend Yield: 2.06%
  • Three-Month Average Daily Volume: 97,889
  • Assets Under Management: $772.5 million
  • Inception Date: July 22, 2015
  • Issuer: BlackRock Financial Management

IGBH provides exposure to long-term U.S. investment grade corporate bonds. Currently, it functions as an actively managed ETF, although between Sept. 1 and Dec. 31, 2021 it plans to start tracking the BlackRock Interest Rate Hedged Long-Term Corporate Bond Index. The fund invests in corporate bonds with investment grade ratings and whose remaining maturities are greater than 10 years. The majority of its holdings have remaining maturities greater than 20 years, and the fund’s largest exposure is in bonds issued by companies operating in the consumer staples sector.

IGBH also employs a rules-based strategy in order to mitigate interest rate risk. It implements this strategy through holding shares of the iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB) and by taking short positions in interest rate swaps. The top three holdings of IGLB include bonds issued by the following companies: AT&T Inc. (T), a communications and digital entertainment holding company; Verizon Communications, a communications, information, and entertainment holding company; and Comcast Corp. (CMCSA), a global media and technology conglomerate.

ProShares Investment Grade-Interest Rate Hedged (IGHG)

  • Performance over One-Year: 7.2%
  • Expense Ratio: 0.30%
  • Annual Dividend Yield: 2.44%
  • Three-Month Average Daily Volume: 120,497
  • Assets Under Management: $920.7 million
  • Inception Date: Nov. 5, 2013
  • Issuer: ProShares

IGHG tracks the FTSE Corporate Investment Grade (Treasury Rate-Hedged) Index, which is comprised of long positions in U.S. dollar-denominated investment grade corporate bonds issued by both U.S. and foreign-based companies and short positions in U.S. Treasury securities. The ETF provides exposure to a diversified group of investment grade corporate bonds and uses short positions in U.S. Treasury futures to target zero interest rate risk. It tends to offer lower interest rate sensitivity than short-term bonds by aiming to achieve a bond duration of zero.

IGHG's top three holdings are bonds issued by the following companies: Goldman Sachs, a global investment bank; GE Capital International Funding, a subsidiary of multinational industrial company General Electric Co. (GE); and Pfizer Inc. (PFE), a multinational pharmaceutical company.

iShares Interest Rate Hedged Corporate Bond ETF (LQDH)

  • Performance over One-Year: 6.2%
  • Expense Ratio: 0.24%
  • Annual Dividend Yield: 1.83%
  • Three-Month Average Daily Volume: 41,811
  • Assets Under Management: $571.1 million
  • Inception Date: May 27, 2014
  • Issuer: BlackRock Financial Management

LQDH is an ETF that provides exposure to U.S. dollar-denominated investment grade corporate bonds. It is currently actively managed but soon plans to start tracking the BlackRock Interest Rate Hedged Corporate Bond Index. The fund follows a rules-based strategy that seeks to mitigate interest rate risk by taking short positions in interest rate swaps. It invests in corporate bonds with remaining maturities ranging from less than one year to more than 20 years. However, its biggest exposure is in bonds with remaining maturities of 20 years or more.

At present, LQDH's largest sectoral allocation is in bonds issued by companies offering banking services, followed by bonds issued by consumer staples companies and those issued by communications firms. The fund does not invest in these bonds itself but gains exposure to them through holding shares of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). LQD's top three holdings are bonds issued by Bank of America Corp. (BAC), an investment bank and financial services holding company; JP Morgan Chase & Co. (JPM), an investment bank and financial services holding company; and Verizon Communications.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.