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Time for Investment Grade Corporate Bond ETFs?

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Treasury bond yields are now at extremely low levels as investors are thronging this safe haven to beat global growth worries.  Plus, monetary stimulus in various corners of the world and a still-dovish Fed have kept the yield low. The benchmark 10-year note yield was 1.71% as of May 13, 2016.

Uncertainties are expected to remain in the marketplace for some more time because neither has oil recovered fully nor has any concrete solution been found yet for China, Japan and Euro zone. Yes, these economies are striving to boost growth, but sustained recovery is unlikely in the near term. In fact, the upheaval in global financial markets has forced the Fed to stay put so far this year even after raising the key interest rate for the first time after almost a decade.

Many market watchers now expect the Fed to hike rates again in September and not in its next meeting in June. All these definitely point to lower Treasury yields, which is why Goldman Sachs cut its projection for 10-year US Treasury bond yields over the next few years. Many other banks also believe the same.

Goldman Sachs now expects its year-end 10-year yield to be 2.4%, down from the 2.75% it projected in the first quarter. Bank of America Merrill Lynch pared down its forecast for the year-end 10-year yield to 2% from 2.65% at the beginning of the year. Morgan Stanley projects a lower 10-year yield at 1.75%, down from 2.7% when the year started.

In short, yield hungry investors intending to restrict their plays within the U.S. boundaries but not trying to expose themselves to the stock market uncertainties, would find investment grade corporate bonds compelling options. The investment grade U.S. corporate bond market has been on a decent path lately as these normally yield more than their Treasury cousins, with only a little rise in risk (see all investment grade corporate bond ETFs here).

Since corporate leverage is presently at its peak level in a decade (as per Goldman Sachs), investors need to be aware of default risks. Now, default risk remains low if investors put their money into investment-grade bonds of some well-established companies. Further if the global economic situation deteriorates and risk-off trade starts to prevail, high yield bonds will be hit harder than the investment grade bonds.

Investors thus can take a look at below-mentioned investment-grade bond ETFs which offer solid yields and scope for decent capital gains. Investors should note that the below-mentioned ETFs yield higher than iShares 20+ Year Treasury Bond ETF (TLT) (as 30-Day SEC yield of TLT was 2.44% as of May 11, 2016) and returned slightly better than it in the last one-month period (as of May 13, 2016). TLT was up about 1.4% in the last one month (as of May 13, 2016) (read: Winning ETF Strategies for Q2).

SPDR Barclays Long Corp Term Bond ETF ()

This fund intends to mainly measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. The corporate bonds have a high investment grade rating as well. The ETF has a weighted average maturity of 23.84 years and a weighted average duration of 14.03 years.

The ETF is an appropriate choice for investors seeking high yield. The ETF’s yield-to-maturity hovers around 4.46% (as of May 12, 2016). The fund returned about 2.8% in the last one month (as of May 13, 2016). It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

iShares 10+ Year Credit Bond ETF (CLY)

The fund holds a basket of 1,710 investment grade long-term bonds having a 30-Day SEC yield of 4.20% (as of May 11, 2016). The fund does a good job by spreading its assets well among various sectors. Consumer Non-Cyclical tops the list with 13.90% allocation, followed by 12.30% to Communications and 9.8% to Electric.

CLY has a weighted average maturity of 23.29 years and an effective duration of 13.11 years. The fund charges 20 basis points as fees. The fund was up about 1.6% in the last one month (as of May 13, 2016) and has a Zacks ETF Rank #3 with a High risk outlook.

Vanguard Long-Term Corporate Bond ETF (VCLT)

The fund holds a basket of 1,661 high-quality corporate bonds having a yield-to-maturity of 4.4%. The fund puts 69% weight in the industrials sector followed by 17.9% in finance. VCLT has a weighted average maturity of 23.9 years and an effective duration of 14.0 years. The fund charges 10 basis points as fees. The fund gained about 2.3% in the last one month (as of May 13, 2016) and has a Zacks ETF Rank #3 with a High risk outlook.

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