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Here's Why You Should Invest in Corporate Bond ETFs

Sweta Jaiswal, FRM

The Federal Reserve announced new initiatives on Mar 23 to support the markets and combat the coronavirus pandemic. For the first time, the central bank confirmed that it would buy investment-grade exchange-traded funds that track the corporate bond market. The Fed’s move is garnering attention of exchange-traded fund investors who are bringing huge inflows. Per Bloomberg’s data, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is already heading toward its best week on record. LQD has witnessed investments amounting to a record $1.5 billion on Mar 24, following a $1-billion influx on Mar 23. The fund also witnessed its biggest gain since 2008 on the same day (read: All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs).

Let’s look at the factors that are making investing in the corporate bond ETFs attractive:

Fed’s Complete Support

The Federal Reserve’s actions aim at supporting households, businesses and the U.S. economy with continuous flow of credit. The central bank plans to create a Secondary Market Corporate Credit Facility in order to combat the coronavirus pandemic-led crisis. The Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds.The Federal Reserve has also said that it would buy $375 billion in Treasury securities and $250 billion in mortgage securities this week, and the purchases of Treasury and mortgage securities that it approved a week ago are unlimited, per an article published on Wall Street Journal.

US Stimulus Package Boosts Confidence

To combat the pandemic-led crisis and support the U.S. economy, the Trump administration has managed a deal with Senate Democrats and Republicans on a massive stimulus package of more than $2 trillion. The package allocates roughly $500 billion for backing loans and support to companies. It also has set aside $50 billion for loans to support the massively-hit U.S. airlines industry, as well as state and local governments. The plan will commit more than $350 billion to aid small businesses. Moreover, around $150 billion will be channelled to hospitals and other health-care providers for equipment and supplies.

The U.S. stimulus package, along with the Fed’s fiscal measures, has relaxed investor concerns regarding the liquidity and corporate defaults, and is attracting more investments. Notably, stalling of operations had put several corporate sectors in tight spot. Fears of rising corporate defaults was prompting investors to dump the space.

Corporate Bond ETFs to Grab

A Columbia Threadneedle portfolio manager, Gene Tannuzzo, has said that “the investment-grade market offers the best risk-adjusted return right now.” Against this backdrop investors can look at the following corporate bond ETFs with Zacks Rank #2 (Buy) (see all Investment Grade Corporate Bond ETFs here):

iShares iBoxx $ Investment Grade Corporate Bond ETF LQD

The fund has gained 14.8% since Mar 23 (as of Mar 25). It provides exposure to a broad range of U.S. investment grade corporate bonds and tracks the Markit iBoxx USD Liquid Investment Grade Index. LQD has an expense ratio of 15 basis points (bps) (read: How to Earn Solid Income With ETFs Amid Record-Low Yield?).

Vanguard Long-Term Corporate Bond ETF VCLT

VCLT has gained 20.4% since Mar 23 (as of Mar 25). The fund invests primarily in high-quality (investment-grade) corporate bonds. It has an expense ratio of 5 bps (read: ETF Strategies to Play the Rising Virus-Induced Volatility).

iShares Long-Term Corporate Bond ETF IGLB

The fund has gained 19.7% since Mar 23 (as of Mar 25). It provides exposure to long-term U.S. investment grade corporate bonds and tracks the ICE BofAML 10+ Year US Corporate Index. IGLB has an expense ratio of 6 bps.

PIMCO Investment Grade Corporate Bond Index Fund CORP

The fund has gained 10.8% since Mar 23 (as of Mar 25). It provides exposure tothe broad investment grade corporate bond sector, before fees and expenses, which may provide excess yield relative to government securities, and might serve as a lower volatility corporate investment than equities. CORP has an expense ratio of 20 bps.

SPDR Portfolio Long-Term Corporate Bond ETF SPLB

The fund has gained 19.9% since Mar 23 (as of Mar 25). It is designed to measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. It has an expense ratio of 7 bps.