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iShares continues to expand its suite of fixed income ETFs in 2012, rolling out a pair of ETFs that bring a new level of granularity to corporate bonds. The Baa-Ba Rated Corporate Bond Fund (QLTB) and B-Ca Rated Corporate Bond Fund (QLTC) will seek to replicate indexes comprised of bonds with specific credit ratings, segmenting the universe of corporate debt into multiple buckets. Currently, the products in the High Yield Bonds ETFdb Category and Corporate Bonds ETFdb Category generally hold securities with multiple credit ratings, covering a wider range of the risk/return spectrum.

The Baa-Ba Rated ETF (QLTB) will straddle the line between investment grade and non-investment grade. Generally, bonds rated Baa3 or higher are considered to be investment grade, while those rated Ba1 and lower are in “junk” status. QLTC will focus its portfolio on bonds that are substantial credit risks, including some components that are in default with little hope of recovery [see Better-Than-AGG Total Bond Market ETFdb Portfolio].

iShares had previously launched the Aaa-A Rated Corporate Bond Fund (QLTA), which focuses on the highest quality investment grade corporate bonds.

Under The Hood: QLTB and QLTC

QLTB

QLTC

Effective Duration 6.6 years 3.9 years
Yield to Maturity 4.4% 7.9%
Weighted Average Coupon 6.3% 8.6%
Expense Ratio 0.30% 0.55%

The index to which QLTB is linked has a yield to maturity of about 4.4%, and consists of almost 1,300 individual bonds. Most of the underlying securities mature in the next one to ten years, with about 15% of the index at the longer end of the maturity curve (25 years or longer). From a sector perspective, QLTB is heaviest in telecom (19%), followed by non-cyclical consumers (13%), energy (11%), and basic industry (10%).

About 70% of the underlying index is in Baa-rated bonds, with 20% or so in Ba-rated securities. So QLTB actually consists primarily of investment grade debt, with a smaller weighting towards junk bonds [see QLTB fact sheet].

QLTC is linked an index that offers a considerably higher yield; the underlying benchmark has a yield to maturity of almost 8% and an average coupon of about 8.6%. QLTC will also be tilted towards the short end of the maturity spectrum; the effective duration is only about four years and about 95% of the portfolio has ten years or less to maturity [see also Bond ETFs For Every Objective].

About two thirds of the QLTC portfolio is in B-rated debt, with the remainder of assets going to Caa-rated debt [see the QLTC fact sheet].

QLTB will charge an annual expense ratio of 0.30%, while QLTC will charge 0.55% annually.

Bond ETF Innovation

Fixed income product development has clearly been a major priority for iShares in 2012; the company has already rolled out several new ETFs offering first to market exposure to various segments of the global bond market.

  • Sector-Specific Corporate Bond ETFs: Financials (MONY), Utilities (AMPS), and Industrials (ENGN)
  • Emerging Markets Junk Bonds (EMHY) and Emerging Markets Corporate Bond (CEMB)
  • Global (GHYG) and Global ex-U.S. (HYXU) Junk Bonds

Disclosure: No positions at time of writing.

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Source: iShares Launches 2 Additional Targeted Corporate Bond ETFs