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Why ‘LQD’ ETF Is A Juggernaut Among Credit ETFs

This article was originally published on ETFTrends.com.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is not just the largest investment-grade corporate bond exchange traded fund. It is one of the largest fixed income ETFs of any variety. Over its more than 16 years on the market, LQD has played an increasingly important role in helping investors of all stripes gain cost-effective, liquid exposure to a broad basket of high-grade corporate debt.

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.

“Credit ETFs trade heavily now, but looking back to 2002, it’s hard to appreciate how novel LQD was at the time,” said BlackRock in a recent note. “It tracked a well-known index of investment grade bonds, providing diversification and trading efficiency.”

The $31.40 billion LQD holds nearly 1,960 bonds and has an effective duration of 8.27 years. Nearly 90% of the fund's holdings are rated A or BBB.


Investment-grade corporate debt is typically less volatile than the the equity market. Over the past three years, total return volatility for U.S. investment grade corporate bonds was roughly 3.4%, compared to the total return volatility near 10% for U.S. stocks.

This segment of the bond market also typically experiences less credit risk as they are issued by high-quality companies with credit ratings between AAA and BBB-. Nevertheless, they do come with the potential to default so they offer a higher yield than similar maturity U.S. Treasuries. LQD is also a favorite among institutional investors.

“LQD’s trading volumes have climbed as investors recognized the fund’s utility. Liquidity, as measured by average daily volume, has grown steadily; liquidity spurred more liquidity, and encouraged additional adoption by institutional investors,” according to BlackRock.

Related: Old Bond ETFs Could be in Style Again

Data indicate LQD is more heavily traded than even some of the most liquid investment-grade corporate bonds.

“Last year was the first time that LQD’s average daily volumes surpassed that of the most liquid individual investment grade bonds, including Verizon and JP Morgan,” said BlackRock. “Earlier this year, LQD broke the record for the single-largest 'block' trade in bond ETF history, a signal that large, institutional investors are confident about their ability to trade and manage risk with LQD in size.”

For more trends in fixed income, visit the Fixed Income Channel.