Investors continue searching for sources of yield beyond government bonds, a trend that is stoking inflows to fixed-income exchange-traded funds (ETFs) tracking debt that is a little more exciting than U.S. Treasuries. That likely explains why investors have added $3.45 billion in new assets to the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) this year, making LQD the most prolific asset gatherer among U.S.-listed bond ETFs. Only six ETFs have added more new assets this year than LQD.
LQD, which holds nearly 1,750 investment-grade corporate bonds, has a 30-day SEC yield of 3.44 percent. That is well above what investors will find on 10-year Treasuries and high enough to keep conservative investors from having to incur credit risk with junk bonds. Actually, some market observers currently favor U.S. investment-grade corporates over high-yield debt. (See also: Top 3 Investment-Grade Corporate Bond ETFs.)
"We see opportunities in U.S. credit. However, credit is not cheap across the board, so we focus on higher-quality corporates within a world of tight credit spreads," said BlackRock, Inc. (BLK) in a recent note. "We favor U.S. investment-grade credit and an up-in-quality stance in high yield. Investment-grade corporate debt offers higher yields than long-end Treasuries at less than half the volatility, our analysis shows."
Just over 84.5 percent of LQD's holdings are rated A or BBB, so credit quality typically is not an issue with this ETF. LQD's effective duration of almost 8.3 years is along the middle part of the yield curve, but this is not a short-term or low-duration product. (See also: Advanced Bond Concepts: Duration.)
Investors looking for a lower-duration ETF idea for investment-grade corporate bonds can consider the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD). As its name implies, SLQD holds only bonds (nearly 1,000) with maturities of up to but no more than five years. Nearly 81 percent of SLQD's holdings are rated A or BBB. For SLQD's modest duration of just 2.36 years, investors will be subject to a lower yield of just over 2 percent. Investment-grade corporate bond ETFs typically are not volatile instruments, but investors looking to skirt volatility will like SLQD's standard deviation of just 1.25 percent, which is a quarter of the comparable metric on LQD. (See also: ETF Flows: Short-Term Corporate Bond ETFs Are Winning Assets.)
Either LQD or SLQD appear to be viable near-term alternatives to high-yield equivalents. "At the beginning of 2016, U.S. high yield spreads were among the widest versus investment grade since the financial crisis," said BlackRock. “A year later, that ratio is back near post-crisis lows. We see investment-grade debt as attractive in the tradeoff between yield and risk."