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Investors Love This Bond ETF

by
September 6, 2016 8:36 am
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Investors Love This Bond ETF

With 10-year Treasurys yielding a piddly 1.6 percent, the nearly 2.9 percent investors can grab with the iShares IBoxx $ Invest Grade Corp Bd Fd (NYSE: LQD) is quite attractive.

LQD, the largest exchange-traded fund holding investment-grade corporate debt, is widely viewed as the benchmark corporate bond ETF among professional investors. The ETF, which recently celebrated its 14th anniversary, holds over 1,600 bonds and does so for a reasonable annual fee of 0.15 percent, or $15 on a $10,000 investment.

Peeking In On LQD

LQD has an effective duration of almost 8.6 years, which is high enough to bring some degree of rate risk into the conversation about this ETF.

Related Link: Can Individual Investors Buy Corporate Bonds

“It is worth noting, however, that at roughly 9.0 years and 8.6 years, respectively, both take on more interest-rate risk than the average corporate-bond mutual fund (7.1 years) or exchange-traded fund (6.1 years),” said Morningstar in a recent note.

The Case For Corporates

LQD offers a compelling alternative to U.S. Treasury ETFs due to its higher-by-comparison yield. However, LQD's yield is, in part, arrived at via a 45 percent allocation to BBB-rated bonds. That is at the lower end of the investment-grade spectrum, but LQD does devote over 53 percent of its weight to corporates rated AA or A.

In a world chock full of low-yielding government debt and trillions of dollars’ worth of negative-yielding sovereigns, it is not surprising that investors are warming to corporate bonds. Data confirm as much. Investors have allocated $6.44 billion in new money to LQD year-to-date, a total exceed by just four other ETFs and enough to make LQD the second-best bond ETF in terms of new assets added to this point in 2016.

A Word Of Caution

Still, investors need to consider interest rate risk, particularly if momentum for a Federal Reserve rate hike later this year increases.

“Through the lens of a 10-year stretch, it would seem like a tough case to make. Combined with this fund’s notable additional volatility, its 6.4 percent 10-year return wouldn’t seem large enough in comparison with the average corporate-bond mutual fund’s 6 percent annualized gain for that period. And in fact, this ETF’s Sharpe ratio, which looks to describe how well an investment has balanced out volatility with high returns, was a bit lower than that of the average corporate-bond mutual fund for the trailing 10 year,” added Morningstar.

More than 27 percent of LQD's bonds are issued by banks while another 17.4 percent hail from consumer non-cyclical issuers. Only two issues command more than three percent of the ETF's weight.

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