Beyond LQD: Exploring Corporate Bond ETF Options

by on August 4, 2010 | ETFs Mentioned:

In recent years, investors have grown increasingly comfortable with the thought of achieving their fixed income exposure through ETFs. Through the first six months of 2010, bond ETFs had seen cash inflows of more than $18 billion, nearly half of the total for the ETF industry as a whole. Many of the most popular bond ETFs fall into the Total Bond Market ETFdb Category, offering broad exposure to the investment grade fixed income universe. But as Washington has continues to issue new debt, many aggregate bond indexes have begun to skew more heavily towards Treasuries, as government bonds and securities issued by agencies of the U.S. government account for bigger portions of the total allocation.

Some investors looking to establish more balanced fixed income exposure have turned to corporate bond ETFs. Not that long ago, ETF options for corporate bond exposure were limited; the iBoxx $ Investment Grade Corporate Bond Fund (LQD) used to be the only game in town. But the last several years have seen tremendous innovation in this corner of the market, as Vanguard, State Street, and others have rolled out new products offering unique and targeted fixed income exposure. Below, we profile more three of the more interesting funds in the Corporate Bonds ETFdb Category [see more at Five Bond ETFs Worth A Closer Look ].

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. Among the more than 500 individual securities are debt from Citigroup, Goldman Sachs, and Pfizer.

The majority of VCSH’s coupon rates lie between 4% and 6%. This ETF covers the high end of the credit spectrum; ratings of underlying holding primarily lie between BBB and AA [see more breakdowns of VSCH's holdings].

VCSH is part of a suite of Vanguard products offering exposure to various durations within the corporate bond space; VCIT covers intermediate duration and VCLT covers long term corporate bonds.

SPDR Barclays Capital International Corporate Bond ETF (IBND)

For investors looking to venture beyond the U.S., State Street’s IBND offers an interesting option. This ETF follows the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, a benchmark designed to be a broad based measure of the global investment-grade, fixed rate, fixed income corporate markets outside the U.S. From a country perspective, Germany (18%), France (12%), and the United Kingdom (10%) make up the largest allocations [see more about this new fund on its fact sheet].

PowerShares also offers an international corporate bond ETF; PICB seeks to replicate the performance of the the S&P International Corporate Bond Index. This fund is similar in many ways to IBND, but also maintains a few critical differences [see International Corporate Bond ETFs Head-To-Head].

BulletShares Corporate Bond ETFs

Claymore recently launched a suite of target maturity corporate bond ETFs, each of which is linked to an index comprised of fixed income securities maturing in a specific year (ranging from 2011 to 2017). Unlike most fixed income ETFs, BulletShares products won’t operate indefinitely, but will gradually to convert to cash as the maturity date approaches and will ultimately make a distribution to shareholders. So from an investor perspective, the experience will be similar to holding an individual bond to maturity–a scenario that allows increased flexibility in managing interest rate risk–although the ETF structure offers the benefit of instant diversification across a number of issuers [see more about these bonds at Claymore Launches Maturity Date Corporate Bond ETFs].

BulletShares can be used to match future cash flow needs, whether it be an obligation of a large pension fund or an individual investor preparing a send a child to college.

For more ETF insights, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.