How to Catch the Corporate Bond ETF Wave

Behind the scenes of the equity rally, corporate bonds of both types are enjoying a rally all their own, leading to a surge in related ETFs.

Thanks to a better-than-expected earnings season, investors are increasingly willing to accept some risk. The average “junk” rated company is not distressed anymore, meaning yields have fallen to less than 10% above the benchmark Treasury bond, say Annelena Lobb and Rob Copeland for The Wall Street Journal. Yields on higher-quality corporations are also sharply lower.

As yields fall, bond prices rise. What’s the case for corporate bonds now?

• Corporate bonds are appealing to investors who want to hedge their bets, as they can serve as a cushion against the unknown conditions for the future of the market.
• The defense? Even if the default rate on high-yield corporate bonds hits the projected 14% rate by the end of 2009, returns from the junk that survives would more than offset the default-related losses, says one market executive.
• The overall health of companies is improving, with 285 companies on a watchlist versus 290 in June and a record 300 in April, Matt Krantz for USA Today reports.
• Investor appetite is ripe for corporate bonds. U.S. companies raised $903 billion year-to-date, up from $548 billion at the same time last year.

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 16.2% year-to-date

• iShares iBoxx $ Investment Grade Corp. Bond (LQD): up 4.6% year-to-date

• SPDR Barclays Capital High Yield Bond (JNK): up 22.7% year-to-date

For full disclosure, Tom Lydon’s clients own shares of LQD.

Comments

[JohnB:]

your graphs look mixed up

Aug 02 10:49 AM

[Russell Ups...:]

Doh!! You put the HYG chart up twice rather than the second one being LQD.

Aug 02 01:09 PM

[Another View:]

So, if JNK and HYG are good now (companies getting healther), why are your clients in only the low yielding LQD, which is priced at a large premium to NAV?

Aug 02 04:00 PM

[Erick Tippett:]

I don't see how anyone could recommend bonds to anyone else
with so much off balance sheet debt floating around. Hello!

E. Tippett
Chicago, Illinois

Aug 02 10:47 PM

[Tom Lydon:]

You guys are right, here is a link to the LQD graph. Thank you for pointing this out.

www.etftrends.com/etf/lqd/

Aug 03 03:37 PM

[maryanne:]

Double doh! bad link, that last / didnt make it in

www.etftrends.com/etf/lqd/

Here's for JNK

www.etftrends.com/etf/jnk/

I brought HYG at 76 and it ran away quickly so brought equivalent amount of JNK instead. My mother need safe so she got LQD (at the March bottom of 91!)

Aug 09 02:12 PM

[maryanne:]

something still wrong with SA handling URLs. Remember to type the last / after clicking

Aug 09 02:13 PM