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The corporate bond market has shown immense investor interest this year on anticipation of the Fed rate cuts this year, which has boosted the demand for higher-quality bonds. This is especially true as a record amount of money has flooded into the U.S. corporate bond markets this year, as investors rush to lock in the highest yields years ahead of the Fed rate cuts, per the Financial Times article (read: ETF Strategies to Play Rising Yields).
Notably, the corporate bond ETFs have pulled in $22.8 billion of capital so far in 2024 — the first positive start to a year since 2019, according to the fund tracker EPFR. The inflows underscore corporate bond attractiveness amid low interest rate environments. Honing in on the ETFs with longer maturity dates seems a compelling choice to earn more yields. Some of these are iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) , iShares Broad USD Investment Grade Corporate Bond ETF (USIG - Free Report) , Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report) , Schwab 5-10 Year Corporate Bond ETF (SCHI - Free Report) and iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report) .
Federal Reserve Chair Jay Powell, in a speech at Stanford University yesterday, reiterated that the Fed would likely reduce interest rates at some point this year, citing that inflation is on a "bumpy" path down to 2%.
There are several reasons that make corporate bonds appealing in a low-rate environment:
Attractive Yields: When interest rates are low, the fixed income (interest payments) offered by corporate bonds becomes more attractive than the yields of savings accounts or government bonds. Investors looking for higher returns might turn to corporate bonds, driving up their prices (read: ETFs in Focus With Fed Rate Cuts in the Cards).
Low Financing Costs: Low interest rates reduce the cost of borrowing for corporations. This can lead to improved financial health for companies, making their bonds more appealing to investors. Companies might also refinance existing debt at lower rates, improving profitability and potentially leading to credit rating upgrades.
Low Default Risk: In low interest rates environments, businesses may perform better, leading to a lower risk of default on their debts. This perceived lower risk makes corporate bonds more attractive.
Capital Gain Potential: Investors might buy corporate bonds not only for interest payments but also for potential capital gains. If interest rates continue to fall, the value of existing bonds with higher interest payments rises as they offer more attractive returns than new bonds issued at the current lower rates.
Here are some details on the above-mentioned ETFs:
iShares iBoxx $ Investment Grade Corporate Bond ETF offers exposure to a broad range of U.S. investment-grade corporate bonds by tracking the Markit iBoxx USD Liquid Investment Grade Index. iShares iBoxx $ Investment Grade Corporate Bond ETF holds 2,778 securities in its basket, with an effective duration of 8.36 years and an average maturity of 13.12 years.
iShares iBoxx $ Investment Grade Corporate Bond ETF has an AUM of $32.2 billion and trades in an average daily volume of 30 million shares. LQD charges 14 bps in annual fees and has a Zacks ETF Rank #3 (Hold), with a High risk outlook.
iShares Broad USD Investment Grade Corporate Bond ETF offers exposure to a wide range of U.S. investment grade corporate bonds with an average maturity of 10.12 years and an effective duration of 6.66 years. It follows the ICE BofA US Corporate Index and holds 10,230 bonds in its basket.
iShares Broad USD Investment Grade Corporate Bond ETF has amassed $10.6 billion in its asset base and trades in an average daily volume of a million shares. It charges 4 bps in annual fees and currently has a Zacks ETF Rank #3.
With an AUM of $8 billion, Vanguard Long-Term Corporate Bond ETF offers diversified exposure to the long-term investment-grade U.S. corporate bond market by tracking the Bloomberg U.S. 10+ Year Corporate Bond Index. It holds a broad basket of 2,872 bonds with an average maturity of 22.6 years and an average duration of 12.8 years.
Vanguard Long-Term Corporate Bond ETF trades in a good volume of 2.3 million shares and has a 0.04% expense ratio. The product has a Zacks ETF Rank #3, with a High risk outlook.
Schwab 5-10 Year Corporate Bond ETF offers exposure to the intermediate-term U.S. corporate bond market with an effective duration of 6.10 years and an average maturity of 7.40 years. The fund holds 2,167 securities in its basket and follows the Bloomberg US 5-10 Year Corporate Bond Index.
Schwab 5-10 Year Corporate Bond ETF has amassed $6.3 billion in its asset base and trades in an average daily volume of 554,000 shares. It charges 30 bps in annual fees from investors and has a Zacks ETF Rank #3 (read: No Rate Cut Until 2H of 2024? High-Yield Short-Term Bond ETFs to Buy).
iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report)
iShares 10+ Year Investment Grade Corporate Bond ETF offers exposure to long-term U.S. investment grade corporate bonds by tracking the ICE BofA 10+ Year US Corporate Index. It holds a broad basket of 3,620 bonds with an effective duration of 12.63 years and an average maturity of 22.42 years.
iShares 10+ Year Investment Grade Corporate Bond ETF has an AUM of $2.1 billion and trades in an average daily volume of 9 million shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #3.
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Time to Invest in Corporate Bond ETFs
The corporate bond market has shown immense investor interest this year on anticipation of the Fed rate cuts this year, which has boosted the demand for higher-quality bonds. This is especially true as a record amount of money has flooded into the U.S. corporate bond markets this year, as investors rush to lock in the highest yields years ahead of the Fed rate cuts, per the Financial Times article (read: ETF Strategies to Play Rising Yields).
Notably, the corporate bond ETFs have pulled in $22.8 billion of capital so far in 2024 — the first positive start to a year since 2019, according to the fund tracker EPFR. The inflows underscore corporate bond attractiveness amid low interest rate environments. Honing in on the ETFs with longer maturity dates seems a compelling choice to earn more yields. Some of these are iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) , iShares Broad USD Investment Grade Corporate Bond ETF (USIG - Free Report) , Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report) , Schwab 5-10 Year Corporate Bond ETF (SCHI - Free Report) and iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report) .
Federal Reserve Chair Jay Powell, in a speech at Stanford University yesterday, reiterated that the Fed would likely reduce interest rates at some point this year, citing that inflation is on a "bumpy" path down to 2%.
There are several reasons that make corporate bonds appealing in a low-rate environment:
Attractive Yields: When interest rates are low, the fixed income (interest payments) offered by corporate bonds becomes more attractive than the yields of savings accounts or government bonds. Investors looking for higher returns might turn to corporate bonds, driving up their prices (read: ETFs in Focus With Fed Rate Cuts in the Cards).
Low Financing Costs: Low interest rates reduce the cost of borrowing for corporations. This can lead to improved financial health for companies, making their bonds more appealing to investors. Companies might also refinance existing debt at lower rates, improving profitability and potentially leading to credit rating upgrades.
Low Default Risk: In low interest rates environments, businesses may perform better, leading to a lower risk of default on their debts. This perceived lower risk makes corporate bonds more attractive.
Capital Gain Potential: Investors might buy corporate bonds not only for interest payments but also for potential capital gains. If interest rates continue to fall, the value of existing bonds with higher interest payments rises as they offer more attractive returns than new bonds issued at the current lower rates.
Here are some details on the above-mentioned ETFs:
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report)
iShares iBoxx $ Investment Grade Corporate Bond ETF offers exposure to a broad range of U.S. investment-grade corporate bonds by tracking the Markit iBoxx USD Liquid Investment Grade Index. iShares iBoxx $ Investment Grade Corporate Bond ETF holds 2,778 securities in its basket, with an effective duration of 8.36 years and an average maturity of 13.12 years.
iShares iBoxx $ Investment Grade Corporate Bond ETF has an AUM of $32.2 billion and trades in an average daily volume of 30 million shares. LQD charges 14 bps in annual fees and has a Zacks ETF Rank #3 (Hold), with a High risk outlook.
iShares Broad USD Investment Grade Corporate Bond ETF (USIG - Free Report)
iShares Broad USD Investment Grade Corporate Bond ETF offers exposure to a wide range of U.S. investment grade corporate bonds with an average maturity of 10.12 years and an effective duration of 6.66 years. It follows the ICE BofA US Corporate Index and holds 10,230 bonds in its basket.
iShares Broad USD Investment Grade Corporate Bond ETF has amassed $10.6 billion in its asset base and trades in an average daily volume of a million shares. It charges 4 bps in annual fees and currently has a Zacks ETF Rank #3.
Vanguard Long-Term Corporate Bond ETF (VCLT - Free Report)
With an AUM of $8 billion, Vanguard Long-Term Corporate Bond ETF offers diversified exposure to the long-term investment-grade U.S. corporate bond market by tracking the Bloomberg U.S. 10+ Year Corporate Bond Index. It holds a broad basket of 2,872 bonds with an average maturity of 22.6 years and an average duration of 12.8 years.
Vanguard Long-Term Corporate Bond ETF trades in a good volume of 2.3 million shares and has a 0.04% expense ratio. The product has a Zacks ETF Rank #3, with a High risk outlook.
Schwab 5-10 Year Corporate Bond ETF (SCHI - Free Report)
Schwab 5-10 Year Corporate Bond ETF offers exposure to the intermediate-term U.S. corporate bond market with an effective duration of 6.10 years and an average maturity of 7.40 years. The fund holds 2,167 securities in its basket and follows the Bloomberg US 5-10 Year Corporate Bond Index.
Schwab 5-10 Year Corporate Bond ETF has amassed $6.3 billion in its asset base and trades in an average daily volume of 554,000 shares. It charges 30 bps in annual fees from investors and has a Zacks ETF Rank #3 (read: No Rate Cut Until 2H of 2024? High-Yield Short-Term Bond ETFs to Buy).
iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB - Free Report)
iShares 10+ Year Investment Grade Corporate Bond ETF offers exposure to long-term U.S. investment grade corporate bonds by tracking the ICE BofA 10+ Year US Corporate Index. It holds a broad basket of 3,620 bonds with an effective duration of 12.63 years and an average maturity of 22.42 years.
iShares 10+ Year Investment Grade Corporate Bond ETF has an AUM of $2.1 billion and trades in an average daily volume of 9 million shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #3.