The iShares Investment Grade Corporate Bond (NYSEARCA:LQD) is one of the largest fixed-income ETFs and provides a reasonable option for investors who don't want to invest in speculative-grade corporate debt.
The $24 billion exchange traded fund pays a distribution yield of about 4% and is highly liquid.
LQD's credit quality is higher than corporate junk bond ETF such as iShares iBoxx High Yield Corporate Bond Fund (NYSEARCA:HYG) and the SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK), which pay higher yields.
"High-quality corporate bonds offer relatively safe income and typically yield more than United States Treasury bonds because of their credit risk. Long-term investors could own LQD as part of a diversified-bond allocation, and tactical investors could own this exchange-traded fund when they feel the corporate-bond market is underpriced versus Treasuries," Timothy Strauts wrote for Morningstar.
LQD has an average trading volume of $2 million shares per day, proving that it has ample liquidity. The consistent track record of 12.1%, 9.1%, 8.9% and 11.7% per year from 2009 through 2012 has given this ETF the right to be the proxy for the corporate bond market, reports Strauts.
LQD has the strongest asset base and superior liquidity than any other corporate bond fund in this sector. The fund tracks an index made up of corporate bonds that have a maturity between 3-25 years. The average credit rating is BBB.
Typical of many other bond funds, LQD is sensitive to interest rate risk and can suffer an 8% loss should rates rise even just 1%.
Other ETFs that are comparable to LQD include the iShares Barclays Credit Bond (CFT) and the PIMCO Investment Grade Corporate Bond (NYSEARCA:CORP).
iShares Investment Grade Corporate Bond
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon's clients own LQD, HYG and JNK.