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Fed's Support Boosts Inflows in Bond ETFs: 5 Top Picks

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The Federal Reserve’s move to buy investment-grade ETFs that track the corporate bond market has garnered attention of investors who have brought huge inflows since late-March. Fed’s move helped restore the liquidity in the fixed-income market along with reduced credit risks. Investors are now increasingly favoring corporate bond ETFs for shielding against volatility that might be observed following the U.S. Presidential elections.

Notably, the Fed has purchased 16 different corporate bond ETFs, with its purchases rising in June to $4.2 billion, going by data from Bloomberg Intelligence. Going on, $28 billion was added to those products by investors who were anticipating the central bank’s moves. In fact, inflows to bond funds have come in at $170 billion in 2020, surpassing $154 billion in all of 2019, per data compiled by Bloomberg.

Per Bloomberg’s data, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) has been the biggest sector gainer. LQD has witnessed investments amounting to a remarkable $17.5 billion along with Vanguard’s Intermediate-Term Corporate Bond ETF (VCIT - Free Report) collecting $12.2 billion in investments, per the same source as mentioned above. Going on, some funds like Vanguard Total Bond Market ETF (BND) and iShares Core U.S. Aggregate Bond ETF (AGG) have also attracted impressive investments of $12.1 billion and $8.2 billion, respectively, without Fed’s support.

Keeping up with the frenzy, around 39 fixed-income ETFs have begun trading so far in 2020, per the article mentioned above. Among the newly-launched funds, iShares 0-3 Month Treasury Bond ETF (SGOV) and Franklin Liberty U.S. Treasury Bond ETF (FLGV) have already seen investments of $890 million and $423 million, respectively.

Commenting on the current scenario, Todd Rosenbluth, head of ETF and mutual fund research for CFRA Research, reportedly said, “we’re already in record territory, and we’re likely to blow that record away, given the volatility headed into an election,” per a Bloomberg article.

Corporate Bond ETFs Look Attractive

Investors may continue opting for fixed-income instruments given the ongoing market uncertainties. The rapidly-spreading coronavirus outbreak seems to have unnerved market participants. United States, India and Brazil together account for a large part of COVID-19 cases in the world. However, cases have started to surge in Europe as well. Investors are apprehensive that another round of business restrictions and lockdown measures might derail the economic recovery achieved so far. 

Meanwhile, making the situation worse, major players in the race to develop coronavirus vaccine and antibodies development have announced the pausing of trials. Given the situation, it looks like another round of stimulus will be absolutely necessary to help the economy amid this health crisis. Moving ahead, this election year could turn out to be the wort with the coronavirus pandemic intensifying by the day.

Against this backdrop, investors can look at the following corporate bond ETFs:

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report)

 It provides exposure to a broad range of U.S. investment grade corporate bonds and tracks the Markit iBoxx USD Liquid Investment Grade Index. LQD has an expense ratio of 14 basis points (bps). The fund has a Zacks Rank #2 (Buy) with a High-risk outlook (read: Inflation Coming? 12 Charts You Must See to Believe).

Vanguard Intermediate-Term Corporate Bond ETF (VCIT - Free Report)

The fund seeks to track the performance of the Bloomberg Barclays U.S. 5–10 Year Corporate Bond Index. It provides diversified exposure to the intermediate-term investment-grade U.S. corporate bond market. VCIT has an expense ratio of 5 bps. The fund has a Zacks Rank #2 with a Medium-risk outlook (see all Investment Grade Corporate Bond ETFs here).

iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB - Free Report)

The fund seeks to track the investment results of an index composed of U.S. dollar-denominated investment-grade corporate bonds with remaining maturities between five and ten years. LQD has an expense ratio of 6 bps. The fund has a Zacks Rank #2.

SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB - Free Report)

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays Intermediate US Corporate Index. SPIB has an expense ratio of 7 bps. The fund has a Zacks Rank #2.


It is important to note that the Fed stopped buying bond ETFs in August. Going by data from Bloomberg Intelligence, up to $30 billion in outflows can be witnessed by corporate-bond products over the next month or two. Moreover, these have already seen outflows of $3.2 billion in September but have regained $6.1 billion in October so far, according to a Bloomberg article.

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