Allstate Corp., the largest publicly-traded insurer of homes and automobiles in the U.S., announced this week that it is making some major shifts in its investment portfolio that now exceeds $100 billion. The Northbrook, Illinois-based company announced that it is reducing its exposure to commercial real estate and municipal bonds in favor of corporate debt.
After a disappointing performance in 2008, corporate bonds have delivered stellar returns in the six months, yielding 13% in the second quarter and more than 9% in the third quarter according to Merrill Lynch. Corporate bonds lost almost 11% in 2008.
Allstate is tilting its debt holdings towards investment grade securities, avoiding the temptations of junk bonds with yields to maturity approaching 10%. “There is probably more of a quality bias to our buying,” Mark Cloghessy, managing director of Allstate’s portfolio management group, told Bloomberg. “We are looking at the investment-grade side of the market, not necessarily the high-yield part of the market.
Judy Greffin, Allstate’s chief investment officer said that the company has reduced its exposure to commercial real estate, including mortgage loans and commercial MBS, by more than $4 billion so far this year.
ETFs To Play Along
For investors who think the professionals behind one of the largest investment funds in the world know what they’re doing (they do have a pretty sound track record), there are several ways to replicate the bets Allstate is currently making through ETFs. For more actionable ETF investment ideas delivered to your inbox, sign up for our free ETF newsletter.
Municipal Bond ETFs
Municipal bonds have long been a favorite investment for individuals and corporations in high tax brackets, but worries about the creditworthiness of the issuers behind these debt securities has weighed on munis in 2009. A short position in the iShares S&P National Municipal Bond Fund (MUB) allows investors to bet on a turbulent road for munis in the final month of the year. For investors looking to target munis of certain maturities, there are a number of options focusing exclusively on short (SMB, SHM, and SUB), intermediate (ITM), and long-term (MLN) securities.
Commercial Real Estate ETFs
There are dozens of commercial real estate ETFs available for investors to consider shorting, including the iShares Dow Jones U.S. Real Estate ETF (IYR), which has big weights in industrial and office, specialty, and retail REITs. For a complete look ETF options, see our Guide to Real Estate ETFs.
In recent months, a great deal of attention has focused on commercial real estate, as investors have attempted to calculate whether the sector will escape relatively unharmed or suffer a fate worse than residential properties. Most analysts anticipate some degree of commercial real estate meltdown, but opinions on the severity of the crash are all over the board.
For investors looking to establish a short leveraged position in commercial real estate, the ProShares UltraShort Real Estate (SRS) and Direxion Daily Real Estate Bull 3x Shares (DRN) present interesting options.
Corporate Debt ETFs
Given its importance in the portfolios of most investors, it is surprising that pure play ETFs options for corporate debt exposure are basically limited to a single fund: the iBoxx $ Investment Grade Corporate Bond Fund (LQD), which invests exclusively in investment-grade corporate debt. LQD holds almost 300 individual securities, has a fund credit rating from S&P of BBB+, and is currently offering a 30-day SEC yield of about 4.8%.
While no other U.S.-listed ETFs invest exclusively in corporate debt, there are several that have big allocations to this asset class, including the Barclays Intermediate Credit Bond Fund (CIU).
Disclosure: No positions at time of writing.