Market Overview

A Credible Corporate Bond ETF Alternative

A Credible Corporate Bond ETF Alternative

By some estimates, there's more than $14 trillion of negative-yielding debt around the world. Plus, the Federal Reserve lowered interest rates this week, putting added emphasis on investor efforts to locate higher levels of income.

What To Know

Investment-grade corporate bonds may be appealing for conservative investors not willing to tempt fate with junk debt at a time of narrowing spreads. The Goldman Sachs Access Investment Grade Corporate Bond ETF (NYSE: GIGB) is an avenue to consider when looking for alternatives to traditional high-grade corporate bond ETFs.

GIGB tracks the FTSE Goldman Sachs Investment Grade Corporate Bond Index, which only features bonds with BBB- ratings and higher and those with maturities of at least one year.

Why It's Important

GIGB “owns most of the corporate bonds from the starting universe and weights them by market value, so it should perform similarly to the broad U.S. corporate bond market most of the time,” said Morningstar in a recent note. “However, it attempts to slightly reduce risk by avoiding the lowest-quality corporate bond issuers (the lowest-ranking 10% in each sector). This defensive posture may cause the fund to sacrifice a little return when credit risk pays off. Overall, it isn’t clear that there is a material benefit to this approach.”

Translation: GIGB is a smart beta ETF in arena traditionally dominated by cap-weighted funds. The fund has an effective duration of 7.53 years, putting it in intermediate territory and that duration is high enough to imply some positive correlation to the recent rate cut. The fund also features something of a quality tilt as nearly 53% of its 1,144 holdings have one of the “A” ratings.

GIGB's underlying index “applies liquidity and fundamental screens, namely change in operating margin and leverage, aimed at improving risk-adjusted returns over a market cycle. The screens seek to reduce exposure to issuers that may be less liquid and/or exhibiting signs of fundamental deterioration,” according to Goldman Sachs Asset Management.

What's Next

Over the past year, GIGB's average 30-day distribution rate was 3.43%, which is enticing relative to the current yields on 10-year Treasuries. Plus, GIGB's annual fee of just 0.14% is modest among smart beta corporate bond ETFs. Up 9.31% year to date, GIGB hit an all-time high on Thursday.

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