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Don’t Sit Idle in Cash: Consider Investment-Grade Corporate Bond ETFs

This article was originally published on ETFTrends.com.

Investment-grade corporate bonds and ETFs, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , can provide conservative fixed income investors with alternatives to cash.

Temping yields and improved balance sheets at large U.S. companies are among the reasons why some financial advisors are favoring exchange traded funds that invest in investment grade corporate bonds. LQD has a duration of 8.45 years.

“Rather than sit idle in cash, investment grade corporate bonds may offer a mix of stability and income to investors seeking to navigate the current market environment,” said BlackRock in a recent note. “Investment grade corporate bonds represent something of a middle ground for investors between riskier equities and perceived safe haven assets like Treasury bonds.”

Fueling the increased demand for debt assets, tumbling yields on safer government and corporate debt pushed investors towar riskier and higher yielding debt, like junk bonds. Furthermore, U.S. corporate bonds are enjoying a stronger tailwind in an environment of strong economic growth, healthy earnings and dropping default rates.

“Investment grade corporate bonds are generally less volatile than the broad equity market. Over the past three years, the total return volatility for U.S. investment grade corporate bonds has been roughly 3.4%, compared with total return volatility near 10% for U.S. stocks,” according to BlackRock.

Mitigate Interest Rate Risk

Investors considering an ETF like LQD while looking to mitigate interest rate risk may want to evaluate the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) . LQDH holds LQD with short positions in interest rate swaps. LQDH “seeks to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, investment grade corporate bonds,” according to iShares.

“Investors should think about their investment goals and time horizon when weighing the merits of investment grade corporate bonds,” said BlackRock. “Dividing the corporate bond yield curve into distinct maturity segments, such as 1-5 years or 5-10 years, allows investors to target specific corporate bond maturity profiles depending on their needs, risk tolerance and investing horizons.”

Related: Why ETFs Don’t Contribute to Junk Bond Market Volatility

LQDH, which tracks the Markit iBoxx USD Liquid Investment Grade Interest Rate Hedged Swaps Index, has an effective duration of 0.07 years.

For more information on corporate debt, visit our corporate bonds category.

Tom Lydon’s clients own shares of LQD.