As a Wall Street Journal report noted, corporate profits are on the rise after a majority of companies have reported their first-quarter earnings. In turn, this could bring more fixed income investors to corporate bonds if the profit outlook remains rosy.
“Earnings per share for companies in the S&P 500 now look to be up 5.2% from a year earlier, according to FactSet, better than the 3.4% analysts expected at the end of March, and marking the strongest growth in nearly two years,” the WSJ report said, noting that second-quarter results could be even better.
“They now expect second-quarter earnings per share to gain 9.8%, compared with 9% at the end of March,” the report said further. “The last time analysts spent the first month of a quarter raising rather than lowering earnings estimates was during the fourth quarter of 2021, according to FactSet earnings analyst John Butters.”
As the WSJ report noted, corporate profits are a prime indicator of a strong economy. If profits continue to rise, corporate bonds can present an attractive option, especially in the current market environment where eventual rate cuts can spur these bonds higher.
For broad exposure, consider using the Vanguard Total Corporate Bond ETF ETF Shares (VTC ). The fund seeks to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The index includes U.S.-dollar-denominated securities publicly issued by industrial, utility, and financial issuers. The fund features a low 0.04% expense ratio and, as of May 6, a 30-day SEC yield of 4.16%.
3 More Options to Choose
For more tailored exposure to various maturity dates, ranging from short-term to long-term, Vanguard also has three more corporate bond funds to consider. The funds can be used individually as part of a core fixed income portfolio or for laddering.
To mitigate rate risk, investors may want to opt for debt with shorter maturity dates. With a 0.04% expense ratio, one fund to consider is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ). The fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
With a 5.79% 30-day SEC yield as of May 6, a more yield-focused option to consider by stepping further out on the yield curve is the Vanguard Long-Term Corporate Bond Index Fund ETF Shares % etf VCLT }. The fund also features a low 0.04 expense ratio and tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies with maturities greater than ten years.
For the best of both worlds, consider the Vanguard Interim-Term Corporate Bond ETF (VCIT ). It tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities of between five and 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.
