To help shore up the economy, the Federal Reserve is purchasing corporate bonds, but they’re not the only ones. Stock investors are also snatching up corporate bonds, especially the investment-trade type as the coronavirus outbreak is making them wary of riskier, higher-yielding debt assets.
“There is a rotation from a number of nontraditional investors out of other asset classes like high yield, distressed debt and equities into investment grade,” said Andrew Karp, head of investment-grade capital markets at Bank of America Corp (BAC). “Among other reasons, it’s a place to hide from volatility.”
A Wall Street Journal report noted that “Issuance of investment-grade bonds in the U.S. hit about $73 billion last week, roughly 21% higher than the previous high-water mark reached in 2013, according to data from Dealogic.”
“Retail-oriented giants like Nike and Home Depot Inc. (HD) were among the biggest initial borrowers—issuing $6 billion and $5 billion, respectively—but the pace of new deals remains high, with names like technology company Oracle and food-services provider Sysco Corp. (SYY) joining the fray Monday,” the report added.
Looking for corporate bond exposure via ETFs? Try these three funds:
- Vanguard Short-Term Corporate Bond ETF (VCSH ): VCSH tracks the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity–the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. VCSH debt holdings mirror those found within the index, so U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies comprise the debt portfolio. Furthermore, in order to curb volatility in the bond markets, maturities are relatively short-duration issues–between 1 and 5 years until maturity.
- SPDR Portfolio Short Term Corp Bd ETF (SPSB ): SPSB seeks to provide investment results that correlate with the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. Once again, O’Leary would benefit from the reduced exposure to volatility with SPSB’s investment in shorter-duration debt with maturities less than three years. In addition, SBSP minimizes credit risk by constructing a debt portfolio that contains only investment-grade bonds with companies that are less likely to default.
- ProShares Investment Grade—Intr Rt Hdgd (IGHG ): IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index so it invests in long positions in USD-denominated investment grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasuries. O’Leary likes to minimize downside risk, so he would probably prefer a corporate bond ETF with a debt portfolio in investment-grade bonds, which is where IGHG invests 80% of its capital. Investment-grade allows investors to mitigate credit risk by allocating capital towards debt issues that are less likely to default versus less-than-investment-grade issues.
This article originally appeared on ETFTrends.com.
