ETFs For Decent Yields With Reduced Risk
In an environment of paltry interest rates, income investors are left dealing with the conundrum of high yield, also meaning higher risk. When it comes to bonds, investors often perceive high yield issues as carrying elevated risk because of default risks.
The other side of the coin is not much more attractive. Less risk means lower yields. For conservative income investors, there is some middle ground in the bond universe, as iShares Chief Global Investment Strategist highlights in a recent research note.
"For those willing to take on marginal risk, we've long argued that investors could focus on equity income and fixed income credit risk rather than fixed income duration risk," said Koesterich. "On the credit side, we continue to believe that both high yield and investment grade bonds may offer good alternatives for investors looking for incremental income."
While yields on junk bonds have started to come in, prompting speculation further capital appreciation will be hard to come by with that asset class, spreads on lower-grade investment-grade fare are still attractive.
"Credit spreads for investment grade bonds–particularly the lower end of the spectrum–still look attractive. Investment-grade debt has recently exhibited a higher yield premium than was historically the case. In addition, while investment grade bonds are offering a much higher yield than Treasuries, in our view, the default risk on corporate debt remains low," according to Koesterich.
Investors looking to capture some yield without excessive can consider the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) and the iShares Baa – Ba Rated Corporate Bond Fund (NYSE: QLTB).
LQD is the largest corporate bond ETF with $24.5 billion in assets under management. The ETF, which pays a monthly dividend, has a trailing 12-month yield of 3.88 percent.
"While investment grade spreads have also narrowed, the drop has been far less pronounced. While high yield spreads are now close to their historic average, and seem in line with what you'd expect given the economic climate, investment grade spreads are still wide relative to history," said Koesterich.
The iShares Baa - Ba Rated Corporate Bond Fund debuted in April and has accumulated almost $10.5 million in AUM. QLTB, which is home to almost 190 holdings, has a 30-day SEC yield of almost 3.4 percent and also pays a monthly dividend. The fund features a weighted average maturity of 10 years and an effective duration of almost 6.6 years.
Koesterich advises an Overweight position on both funds.
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