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A Quality Idea Among Corporate Bond ETFs

This article was originally published on ETFTrends.com.

A growing number of fixed income exchange traded funds offer factor-based strategies and some of those funds also employ fundamental screens, including the Goldman Sachs Access Investment Grade Corporate Bond ETF (NYSEArca: GIGB) .

Last week, the Federal Reserve raised interest rates for the third time this year, prompting fixed income market participants to speculate a fourth rate hike will arrive in December and that the Fed will again raise rates multiple times next year.

GIGB tracks the FTSE Goldman Sachs Investment Grade Corporate Bond Index and only holds bonds with at least one year to maturity and a minimum rating of BBB-. GIGB also applies a fundamental screen to measure issuers by operating margin and leverage.

GIGB targets quality bonds while employing metrics such as ear-over-year change in profit (EBIT) margin and debt/enterprise value.

“It owns most of the corporate bonds from the starting universe and weights them by market value, so it should perform similarly to the broad U.S. corporate bond market most of the time,” said Morningstar in a recent note. “However, it attempts to slightly reduce risk by avoiding the lowest-quality corporate bond issuers (the lowest-ranking 10% in each sector). This defensive posture may cause the fund to sacrifice a little return when credit risk pays off. Overall, it isn't clear that there is a material benefit to this approach.”


GIGB, which is about 16 months old, holds 973 bonds. Among smart beta fixed income strategies, the fund is one of the more cost-competitive names in the group with an annual fee of just 0.14%, or $14 on a $10,000 investment.

GIGB competes with the likes of the Vanguard Total Corporate Bond ETF (VTC) .

“We would expect this quality-oriented fund to have slightly less credit risk than Vanguard Total Corporate Bond ETF (VTC), which tracks the broad Bloomberg Barclays US Corporate Bond Index,” said Morningstar. “Consistent with this expectation, it has slightly lower exposure to BBB-rated bonds, and slightly greater exposure to AA-rated bonds. However, the regression analysis suggests that the index the fund tracks has tended to exhibit slightly higher exposure to credit risk.”

GIGB's effective duration is 7.20 years.

For more on fixed income ETFs, visit our Fixed Income category.