A Short-Term Corporate Bond to Consider as Spreads Tighten
This article was originally published on ETFTrends.com.
As the Federal Reserve continues its tightening cycle, some fixed income investors are moving to short-term bond funds.
Corporate bonds should be part of that conversation and the SPDR Portfolio Short Term Corp Bd ETF (SPSB) is one exchange traded fund that can help investors stick with this income-generating asset class while reducing interest rate risk.
SPSB seeks investment results that correlate with the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index, which is designed to measure the performance of the short term U.S. corporate bond market. Some data points suggest today's credit spreads may be tighter than fixed income investors realize.
“The composition of the Barclays U.S. Credit Index has changed drastically since its inception 30 years ago, and over time the credit quality of the index has migrated downward,” said State Street Global Advisors (SSgA) in a recent note. “The result is that credit spreads may be tighter than investors realize, and certain historical comparisons may be misleading.”
SPSB holds 1,100 bonds with an option-adjusted duration of 1.89 years.
More Details on 'SPSB' ETF
SPSB invests substantially all, but at least 80%, of its total assets in the securities comprising the index or in securities that have similar economic characteristics to those of the securities that comprise the index. Since the index is designed to measure the performance of the short term U.S. corporate bond market, it gives investors a solid mix of interest rate risk hedging while limiting duration
“If the current investment grade credit spread level of 108 bps vs. its historical average of 122 bps seems tight, it is,” said SSgA. “It stands 11% below its average. However, when accounting for the fact that the 108 bps historical average is reduced by a period when the index’s credit quality was much higher, we could make the argument that the historical 'neutral' level should be 17 bps wider and stand at 133 bps.”
Just over 82% of SPSB's holdings are rated A or Baa. In the current environment, there are advantages to consider with investment-grade ETFs like SPSB.
“Impacts of credit changes in the investment grade space will become particularly important if there is a risk off event, as investment grade debt may sell-off more than usual given this change in rating composition,” according to SSgA.
For more trends in fixed income, visit the Rising Rates Channel.
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