Market Overview

Koesterich Likes Corporate Debt, EM Bonds (LQD, EMB, LEMB)


In a recent blog post iShares' Russ Koesterich said yield-starved investors are faced with a catch-22: "Accept lower income or take on additional risk to generate incremental yield."

Emphasizing that investors must assess their individual objectives and risk tolerance levels, Koesterich said he sees opportunities in high-grade U.S. corporates, high-grade municipals and emerging markets bonds.

Koesterich advocates an overweight position in investment grade U.S. corporate debt, saying "the Baa segment (based on Moody's Baa Corporate Bond Index) of investment grade, investors have an opportunity to pick up roughly 300 basis points over a 10-year Treasury. Not only is this spread high by historical standards, but it's available at a time when government credit quality is deteriorating and corporate balance sheets have rarely looked better."

One option to consider on that front is the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD). With $20.2 billion in AUM and an expense ratio of just 0.15%, LQD features a distribution yield of almost 4.09%. The fund is up 3.2% year-to-date.

Regarding emerging markets bond funds, Koesterich highlighted the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB) and the iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB).

LEMB, which debuted in October 2011, has $30.1 million in AUM, fees of 0.6% and a distribution yield of almost 4.8%. The fund holds emerging markets bonds denominated in local currencies. South Korea and Russia combine for over a third of the ETF's country weight.

EMB features emerging markets bonds denominated in U.S. dollars. The $4.5 billion fund also charges 0.6% and yields 4.72%, according to iShares data. Brazil, Russia, Mexico and Turkey combine for about 30% of EMB's country weight.

Other emerging markets bond funds to consider include the newly minted WisdomTree Emerging Markets Corporate Bond ETF (Nasdaq: EMCB) and the even newer iShares Emerging Markets Corporate Bond Fund (BATS: CEMB). CEMB debuted last week.

In the note, Koesterich said he is long EMB and LQD.

For more on emerging markets bond ETFs, please click HERE.

Posted-In: Long Ideas News Bonds Short Ideas Dividends New ETFs Emerging Market ETFs Intraday Update


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