A Post-Fed Corporate Bond ETF Idea

Prior to and following the Federal Reserve raising interest rates for the first time in nearly a decade earlier this month, the corporate bond exchange traded funds receiving the most attention (and it was rarely positive), were junk bond funds.

Amid a spate of energy issuer defaults and downbeat performances by CCC-rated issues, tensions are running high in the U.S. junk bond market. Add to that, ETFs such as HYG and JNK have been plagued by abundance of issues from the downtrodden energy and materials sectors. Those groups account for the bulk of high-yield defaults this year.

Perhaps to their benefit, investment-grade corporate bond ETFs have not been spending much time in the spotlight in recent weeks, but credit historically performs well immediately following rate hikes. That could be a sign ETFs, such as the unheralded WisdomTree Strategic Corporate Bond Fund CRDT, merit consideration.

Actively managed, CRDT debuted nearly three years ago, is a global fund managed in partnership with California-based Western Asset Management.

“Western Asset incorporates both top-down and disciplined bottom-up analysis in uncovering corporate bond opportunities in the United States and around the world. By taking a global view of credit, the team at Western is able to think strategically about what risks are ultimately worth taking,” according to WisdomTree.

Home to nearly 70 issues, more than 60 percent of the bonds held by CRDT are issued by North American companies and the ETF is predominantly an investment-grade fund as nearly 70 percent of its holdings are rated BBB, AA or A. 

“Additionally, investors can generally view any Fed rate hikes as a vote of confidence from policy makers that the overall health of the economy is strong enough to necessitate higher rates. This boost in confidence appears to persist across sectors for at least the first six months, as evidenced by 2004 data. Finally, during periods of rising rates, many investors seek out corporate credit as one way to help dampen the impact of rising nominal interest rates,” said WisdomTree in a recent note.

WisdomTree goes on to note that with consumer discretionary and technology being the exceptions, bond across other sectors see spreads tighten following a Fed rate hike and then widen as the tightening cycle peaks with issues from the financial services and materials sectors being particularly strong performers over the cylcle. Conversely, communications credit lags.

CRDT currently allocates 28.2 percent of its weight to financial services credit, the ETF's largest sector weight. Consumer and materials issues combine for over 18 percent while telecom and media credit represent a mere 8.5 percent combined of the CRDT's lineup.