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Corporate Bond ETF Bonanza

Gene Koyfman

And what great news when you consider that, adjusted for inflation, it’s only possible to achieve positive yields by going more than 10 years out on the curve.

That’s true even when you take into consideration the recent uptick in Treasury yields.

In other words, I’m guessing demand for all these new products, particularly a family of new corporate bond funds from iShares, is going to be robust.

(Source: www.Treasury.gov )

After all, corporate bonds have seen inflows of over $12.4 billion so far this year, with U.S. high-yield bond funds garnering the most favor with investors.

The iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca:HYG - News) and the SPDR Barclays Capital High Yield Bond ETF (NYSEArca:JNK - News) pulled in a little less than half of the fund flows over the period.

That demand for junk bonds suggests issuers won’t have too much trouble finding a public for all these first-of-their-kind fixed-income ETFs that are now on the market. Together, all these new ETFs amount to a greater range of options for expressing investment views.

The New-New Things

iShares started things off by launching a number of first-generation corporate bond funds focused on different industries.

The iShares Utilities Sector Bond ETF (NYSEArca:AMPS - News), the iShares Industrials Sector Bond Fund (NYSEArca:ENGN - News) and the iShares Financial Sector Bond Fund (NYSEArca:MONY - News) are the first sector-oriented U.S. corporate bond funds.

Also launched was the iShares Aaa-A Rated Corporate Bond ETF (NYSEArca:QLTA - News), the first fund to segment the U.S. corporate market by credit quality. Rounding out the credit exposure offering was the iShares Barclays CMBS Bond Fund (NYSEArca:CMBS - News).

For defensive plays, obviously QLTA is a solid choice, as it avoids the tail end of the investment-grade spectrum.

The lower spreads in the industrials and utilities sectors suggests that these have less credit risk priced in, and should serve investors who are cautious about credit risk, but are looking for the extra yield.

For more aggressive investors, MONY, the fund focused on financials, can be a great option.

Yield spreads are significantly higher on financial institution bonds than the other sectors, and not without reason. The European debt crisis still hangs over the industry and concerns remain about domestic stability and impact of post-financial crisis regulation.

That said, after recent stress tests conducted by the Federal Reserve on institutions with more than $50 billion in assets, most were deemed to have appropriate levels of capital to withstand another major economic downturn.

If in fact there’s a brighter light at the end of the tunnel, a collapse in spreads for financial institutions would be a boon for investors.

CMBS provides an interesting play in the fixed-income space on the improving economy.

Because these securities are backed by commercial loans for properties such as strip malls and office space, an expanding economy and more lively consumers are likely to lift demand for commercial space. That increase should, in turn, reduce the credit risk in the commercial real estate space, reducing spreads in the process.

Choices, Choices

Close on the heels of iShares' ambitious rollouts was the launch of the WisdomTree Emerging Markets Corporate Bond ETF (NYSEArca:EMCB - News)—the first bond ETF focused on corporate debt denominated in both local and U.S. dollars from the companies in the developing world.

It’s hardly news these days that the developing world is where much of the most robust growth is coming from, even with all the talk about Chinese growth slowing.

Most recently, State Street went back to the well and launched the SPDR Barclays Capital Short Term High Yield Bond (NYSEArca:SJNK - News)—a shorter-duration cousin of the highly popular SPDR Barclays Capital High Yield Bond Fund (NYSEArca:JNK - News), which has raked in $2.6 billion in net flows since the start of 2012. The shorter duration allows investors to have less exposure to potential changes in interest rates, while still maintaining the ability to take on the higher credit risk and yield in junk bonds.

Unlike the other funds, SJNK faces competition for assets from the Pimco 0-5 Year High Yield Corporate Bond ETF (NYSEArca:HYS - News), which pulled in $79 million in inflows this year. I think demand for this segment of the bond market is palpable enough for both funds to be very successful and add value to investors.

Despite the Fed’s continued support for low rates through 2014, the direction of interest rates is more unclear than ever before.

As a result, the increasing desire to reduce duration while maintaining yield will be a hot commodity for fixed-income investors.

And there’s no doubt in my mind that this year’s launches provide investors with new tactical tools to tackle this problem.

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