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 broad U.S. equity market over the past year.
- The best investment grade corporate bond ETFs for Q3 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.
The investment grade corporate bond ETF universe is comprised of about 61 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). 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 with a total return of 6.3% over the past 12 months compared to the S&P 500's total return of 50.0%. The best-performing investment grade corporate bond ETF for Q3 2021, based on performance over the past year, is the iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH). We examine the 3 best investment grade corporate bond ETFs below. All numbers below are as of May 12, 2021.
- Performance over 1-Year: 22.5%
- Expense Ratio: 0.16%
- Annual Dividend Yield: 2.14%
- 3-Month Average Daily Volume: 100,213
- Assets Under Management: $733.0 million
- Inception Date: July 22, 2015
- Issuer: BlackRock Financial Management
IGBH is an actively managed ETF that provides exposure to long-term corporate U.S. investment grade corporate bonds. It invests in corporate bonds with investment grade ratings and whose remaining maturities are greater than ten years. The majority of its holdings have remaining maturities greater than 20 years. 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.
- Performance over 1-Year: 17.6%
- Expense Ratio: 0.30%
- Annual Dividend Yield: 2.52%
- 3-Month Average Daily Volume: 91,087
- Assets Under Management: $704.1 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. The fund tends to offer lower interest rate sensitivity than short-term bonds by aiming to achieve a bond duration of zero. Its top three holdings include bonds issued by the following companies: Goldman Sachs Group Inc. (GS), a global investment bank; Pfizer Inc. (PFE), a multinational pharmaceutical company; and GE Capital International Funding, a subsidiary of multinational industrial company General Electric Co. (GE).
- Performance over 1-Year: 15.5%
- Expense Ratio: 0.24%
- Annual Dividend Yield: 1.98%
- 3-Month Average Daily Volume: 40,000
- Assets Under Management: $587.0 million
- Inception Date: May 27, 2014
- Issuer: BlackRock Financial Management
LQDH is an actively managed ETF that provides exposure to U.S. dollar-denominated investment grade corporate bonds. It follows a rules-based strategy that seeks to mitigate interest rate risk by taking short positions in interest rate swaps. The fund invests in corporate bonds with remaining maturities ranging from less than 1 year to more than 20 years. However, its biggest exposure is in bonds with remaining maturities of 20 years or more. Its 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 include 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.
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