ETFs

A Diversified Approach To Play Corporate Bond ETFs

As strength of a sustainable economic recovery continues to remain wary, unemployment remains high and consumer demand grows at a snail’s pace, corporate bonds, and the exchange traded funds (ETFs) that track them, could pose an opportunity for investors.

A notable play of the corporate bond market is the SPDR Barclays Capital International Corporate Bond ETF (IBND), which tracks the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, carries an expense ratio of 0.55% and gives investors exposure to debt that is denominated in local currencies.

IBND focuses on investment-grade corporate bonds and gives exposure to the following currencies: Euro, Australian Dollar, Canadian Dollar, New Zealand Dollar, British Pound, Japanese Yen, Swiss Franc, Swedish Krona and the Danish and Norwegian Krone. Although IBND excludes US Dollar-denominated bonds, it does include bonds issued by US companies which are payable in other currencies. In fact, according to the fund’s prospectus, the US has the largest country weighting at 17.5%, followed by Germany at 16.1% and the United Kingdom at 12.5%.

In regards to sector weightings, IBND is heavily focused on financials, industrials and utilities, which constitute 46.9%, 39.5% and 11.6% of its asset base, respectively. Additionally, the underlying index that IBND seeks to track boasts a yield of 3.05%, which can be expected if IBND tracks its underlying index accurately.

Of the holdings in the newly traded ETF, all the bonds in the fund are rated Baa or higher, with nearly half of them carrying a rating of A or better and the average maturity for the bonds is 5.3 years with a modified adjusted duration is 4.4 years.

Another notable mention regarding the international bond market is that PowerShares has also filed the necessary paperwork to launch the International Corporate Bond Portfolio (PICB), which will seek to replicate the performance of the S&P International Corporate Bond Index and give exposure to international corporate bonds.

Another way to play corporate bonds is through the Vanguard Short-Term Corporate Bond Index Fund (VCSH).  This ETF seeks to replicate the Barclays Capital U.S. 1-5 Year Corporate Index, a benchmark that includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies with maturities between 1 and 5 years

The majority of VCSH’s coupon rates lie between 4% and 6% and debt ratings of underlying holdings primarily lie between BBB and AA. 

Although an opportunity may prevail in corporate bond ETFs, it is a good idea to have an exit strategy which helps mitigate the risks that they carry.

Disclosure: No Positions

Categories: ETFs, Recent Articles

Tagged as: , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s