LQD: A Compelling Buy for Canadian Investors (And Those in the U.S. As Well)

Jan.30.11 | About: iShares iBoxx (LQD)

Within our bond allocation, we recently shifted some weight from XLB.TO, a Canadian ETF, to LQD, a U.S. ETF. For the one-page PDF, click here.

XLB holds various Canadian government bonds and has an average term of about 22 years and a yield of 4.5%. LQD holds U.S. corporate bonds and has an average term of about 12 years and a yield of 4.9%.

We believe Canada is further along than the U.S. in its economic recovery. It is likely the Bank of Canada will begin raising interest rates before the Federal Reserve. Bond ETFs are hurt by rate increases. The longer we can postpone, the better. The BoC could raise by this summer. The Fed raise is unlikely before 2012.

Also, with the Loonie at par, there is little currency risk. In fact, we believe the USD will likely strengthen versus the CAD. Stimulus spending has devalued the USD but the current round ends in June. Tighter, or at least "less loose", money supply and improving fundamentals will strengthen the USD after that.

LQD holds quality U.S. corporate issuers in a wide range of maturities. It has a better yield and lower fees than Canadian bond ETFs. Total return in 2010 was about 9.1%. A good yield and possible currency gains should provide decent returns. We expect to hold it through 2011 but will sell as U.S. conditions improve.
Our archerETF Oscillator puts LQD at a reasonable valuation right now, as the chart below shows. Other details are in the table.

Click to enlarge:
Click to enlarge

  • archerETF Metrix: [[LQD]]

  • Category: U.S. Fixed Income

  • Benchmark: U.S. Corporate Bonds

  • Total Holdings: 584 Bonds/215 Issuers

  • 52 Week High: $112.22

  • Recent Price: $108.46

  • 52 Week Low: $98.97

  • Avg Daily Volume: 1.20 Million Shares

  • Avg Daily Volume: ($)$129.70 Million

  • Total Market Cap: $13.21 Billion

  • ETF Annual Fee: 0.15%

  • ETF Trading Currency: USD

  • ETF FX Exposure: USD

  • Annual Volatility: 11.1%

  • Correlation to S&P 500: 0.17

  • Return to Risk Ratio: 2.78

  • Use of Leverage: No

  • Use of Futures: No

  • 6 month Return:1.89%

  • 1 Year Return: 8.78%

  • 2 Year Return: 22.93%

  • 3 Year Return:18.95%

  • Distribution Yield: 4.87%

  • Average Coupon: 5.81%

  • Average Maturity: 12 years

  • Effective Duration: 7.1 years

  • Short/Mid/Long Maturities: 27% / 46% / 28%

  • Average Credit Ratings: 53% High / 47% Mid

Disclosure: I am long LQD.

Additional disclosure: Long XLB.TO