Speculative grade bonds come with attractive yields, but investors have started to hedge against riskier bets. Meanwhile, investment-grade corporate debt exchange traded funds are starting to outperform as investors move toward safety.
Given the recent bout of uncertainty in the equities markets, investors moved back into safety. Investment grade corporate offer a nice mix of yield and safety, an ideal combination in this market environment, writes Eric Dutram for Zacks.
"U.S. corporations are doing very well. They have record amounts of cash on their balance sheets, and profit margins are at all-time high levels," according to Morningstar analyst Timothy Strauts. "Defaults are not expected to be a major concern in the next few years, because companies have positioned themselves conservatively. Many equity investors feel that corporations are being too cautious and not taking enough risks. From a bond investor's perspective the current air of cautiousness may allow credit spreads to tighten even further."
Additionally, with deflationary pressures and a stubbornly high unemployment rate, the Federal Reserve does not look like it will tighten monetary polices any time soon, giving intermediate-term bonds more breathing room.
LQD offers a 30-day SEC yield and comes with a 0.15% expense ratio. The bond ETF has a 7.93 year effective duration. The duration is a measure of the bond's price sensitivity toward shifts in interest rates - bond prices and interest rates have an inverse relationship, so a higher interest rate translates to a lower bond price.
Looking at the fund's credit quality, LQD is largely comprised of investment grade bonds AA 15%, A 53% and BBB 28%.
Another intermediate-term corporate debt ETF includes the iShares Barclays Credit Bond Fund (CFT), which has a 2.36% 30-day SEC yield, a 0.20% expense ratio and a 6.67 years effective duration. CFT's credit quality allocations include AAA 8.5%, AA 13%, A 43% and BBB 32%.
The Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) has a 0.12% expense ratio, a 6.5 years average duration and a 2.57% 30-day SEC yield. Credit qualities include Aaa 1.1%, Aa 6.7%, A 45.8% and Baa 46.3%.
Additionally, the PIMCO Investment Grade Corporate Bond Index ETF (NYSEARCA:CORP) comes with a 2.46% 30-day SEC yield, an effective duration of 6.54 years and a 0.20% 30-day SEC yield. CORP's credit breakdown includes AAA 1.0%, AA 11%, A 40% and BBB 38%.
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own HYG and LQD.
Disclosure: I am long HYG, LQD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.