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Zacks Top Ranked Corporate Bond ETF: LQD


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As yields remain low, income seeking investors continue to struggle. In their thirst for robust payouts, many of these investors have gone beyond conventional yield sources. This has surely disrupted the fragile risk-return tradeoff that they strive for, thereby putting their entire portfolio at risk.

Many of the dividend yielding equities had previously felt the wrath of the fiscal cliff which was characterized by tremendous sell offs from these stocks. Some of the victims were utilities stocks, MLPs and REITs.

Thankfully, now that we have a temporary resolution over this issue, most of these higher yielding avenues have again caught the limelight on account of some clarity over the problem (read Zacks Top Ranked Bond ETF: SHV).

On the other hand, in the case of fixed income securities, things are not as clear as many would have wanted. Treasury bonds can plummet anytime if the Fed slows down the monetary easing program, however unlikely as it might seem at the present moment.

Also, non-investment grade corporate bonds (junk) are a risky phenomenon at the present moment. This is primarily because of the mere size of the debt in the balance sheets of their issuers, which might trigger a boost in defaults at anytime.

However, investment grade corporate bonds definitely have a higher position in the risk return tradeoff hierarchy. This is especially true considering the present situation of their Treasury and non investment grade corporate bond counterparts.

These bonds might carry low coupon rates compared to the others; however, they can go a long way in optimizing the desired results for yield hungry investors without taking on a risk premium (see Australia ETFs to Play the Coming Shale Boom).

With this backdrop, investors seeking exposure in the investment grade corporate bond space in the wrapper of an ETF can consider the following Zacks top ranked bond ETF.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.

Using this strategy, we have found a Zacks ETF Ranked 2 or ‘Buy’, which we have highlighted in greater detail below:

With an asset base of $24.15 billion and an average daily volume of ,ore than 2.2 million shares, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is by far the most popular ETF from the U.S. Corporate bond space. The ETF’s inception goes way back to July of 2002 (see Gold ETFs Meet Covered Calls in Brand New GLDI).

This product from iShares tracks the Markit iBoxx USD Liquid Investment Grade Index. The index tracks the performance of investment grade corporate bonds which are denominated in U.S. dollars.

At present, the ETF consists of around 1,069 securities. LQD charges investors 15 basis points in fees and expenses.

It targets the intermediate end of the yield curve with a weighted average maturity of 11.87 years. However, a weighted average duration of 7.69 years signifies a relatively high level of interest rate risk (see More Trouble Ahead for Italy and Spain ETFs?).

The ETF has returned 10.24% for the fiscal year 2012 in terms of total returns, out of which it has generated a yield of 3.87%. Also, from a sector viewpoint the ETF allocated maximum to the Financial, Consumer Staples and Energy sectors.

The ETF currently has a Zacks ETF Rank of 2 or ‘Buy’ so we are looking for good things out of this fund this year. It should offer up a nice yield to investors who do not want to get too risky, while still paying out significantly more than T-bills as well.

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