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A Mammoth ETF for Cost-Efficient Corporate Bond Exposure

This article was originally published on ETFTrends.com.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is the largest exchange traded fund dedicated to investment-grade corporate debt and remains the go-to choice for many investors looking to asset this asset class.

LQD seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.

“There is a lot to like about this fund, from its durable cost advantage to its broadly diversified market-cap-weighted portfolio that approximates the composition of the U.S.-dollar investment-grade corporate-bond market,” said Morningstar in a research note. “However, the fund's exclusion of bonds with less than three years until maturity gives it more interest-rate risk than most of its peers and prevents it from fully representing the opportunity set.”

'LQD' ETF Details

The $33.55 billion LQD holds 1,957 bonds. LQD has an effective duration of 8.37 years and a weighted average maturity of 12.68 years.

“Reflecting the composition of the market, the fund tilts toward bonds at the lower end of the investment-grade credit spectrum. Nearly 90% of the portfolio is invested in bonds rated A and BBB, so it does have a fair bit of exposure to spread risk. But like most investment-grade funds, interest-rate risk is the primary driver of the fund's returns,” according to Morningstar.

Related: Muni Bond ETFs Offer a Stable Source of Income

As credit spreads tighten, LQD could be appealing because lower rated bonds are more sensitive to spread changes. Nearly 48% of LQD's holdings are rated BBB, which is the lower end of the investment grade space.

“Narrowing credit spreads give lower-quality bonds a boost. The lower the bond's credit quality, the more sensitive it is to changes in the credit spread. This fund has some spread risk since it has considerable exposure to bonds at the lower end of the investment-grade credit spectrum,” said Morningstar.

The research firm has a Bronze rating on LQD.

For more information on the fixed-income market, visit our bond ETFs category.

Tom Lydon’s clients own shares of LQD.