Market Overview

Wide Bond Exposure In One ETF

Wide Bond Exposure In One ETF

Multiple exchange traded funds offer broad-based bond market exposure on the cheap. One of the funds sporting those traits is the iShares Core Total USD Bond Market ETF (NASDAQ: IUSB).

The $2.14-billion IUSB tracks the Bloomberg Barclays U.S. Universal Index, which is something of an extension of the widely followed Bloomberg Barclays Aggregate Bond Index. The ETF holds 6,363 bonds and is the only fixed-income ETF that follows the Bloomberg Barclays U.S. Universal Index.

What Happened

Although the Federal Reserve has raised interest rates once already this year, with several more hikes potentially in the works, bond ETFs have been popular with investors. Year-to-date, four bond funds are among the top 10 ETFs in terms of new assets added.

For its part, IUSB has seen 2018 inflows of $235.17 million, a decent percentage of the fund's $2.14 billion in assets under management. Investors' affinity for low fees undoubtedly helps IUSB. The ETF charges just 0.06 percent per year, or $6 on a $10,000 investment. Only a handful of bond funds have lower expense ratios.

Why It's Important

“This fund offers exposure to a wide range of taxable, U.S.-dollar-denominated bonds with maturities of one year or longer and any credit rating. It weights these securities by market capitalization, tilting the portfolio toward investment-grade bonds,” said Morningstar.

Credit risk is not a major consideration with IUSB, as nearly 61 percent of its holdings are rated AAA and the ETF features scant exposure to junk-rated debt. Over 55 percent of IUSB's roster is comprised of U.S. Treasuries or mortgage-backed-securities.

What's Next

While IUSB's portfolio is mostly highly rated, diminishing credit risk, there is an element of interest rate risk to consider.

“Although the fund’s duration is similar to the category average, it has considerable exposure to interest rate risk. Its duration of 5.3 years implies that if the rate rises by 1 percentage point, in theory this fund would lose approximately 5.3 percent of its value,” according to Morningstar. “The fund’s duration can change over time because it does not impose a maximum maturity limit and weights its holdings by market capitalization.”

Despite low exposure to high-yield bonds, IUSB has a decent 30-day SEC yield of 3.15 percent. Morningstar rates the fund Silver.

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