A Bright Idea Among Corporate Bond ETFs

The U.S. corporate bond market is becoming tricky to navigate. Morgan Stanley recently estimated $2.5 trillion worth of U.S. investment-grade corporate bonds carry BBB ratings. Translation: about half the total U.S. corporate bond market is one to three notches away from junk territory.

Some bond market observers are increasingly concerned about the specter of a rash downgrades to those barely investment-grade bonds and the implications for broader markets should a spate of downgrades come next year.

What Happened

Getting involved with corporate bonds, even investment-grade issues, may appear risky, but investors can mitigate some of that risk by emphasizing fundamentals. The WisdomTree Fundamental U.S. Corporate Bond Fund WFIG accomplishes that objective.

“To address these concerns about issuer fundamentals, the WisdomTree Fundamental U.S. Corporate Bond Index (WFCIG) was designed to provide an alternative to blindly allocating across the credit spectrum,” said WisdomTree in a recent note. “It offers an intuitive approach to identifying  debt issues with quality fundamentals and attractive income profiles.”

The WisdomTree Fundamental Corporate Bond Index is WFIG's underlying index.

Why It's Important

There are marquee differences between how WFIG's components are evaluated and the cap-weighted strategy used by traditional corporate bond ETFs. Those differences could be advantageous for WFIG investors in the current climate for corporate debt.

“A key difference between WFCIG and the ICE BofAML U.S. Corporate Index is that fewer bonds in WFCIG have been downgraded to non-investment-grade or junk status,” said WisdomTree. “When companies lose their investment-grade rating, many managers may be forced to sell these positions, according to their investment policy statements. As a result, these bonds often underperform in the short run after being downgraded. “

Even with its advantages, WFIG has a 30-day SEC yield of 4.11 percent, less than 30 basis points below the comparable yield on the widely followed Markit iBoxx USD Liquid Investment Grade Index.

What's Next

WFIG's effective duration is 6.94 years, or a year and half below the duration on the Markit iBoxx USD Liquid Investment Grade Index. Over the past year, WFIG has topped the Markit iBoxx USD Liquid Investment Grade Index by about 1.5 percent.

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