Taking on credit risk but not interest rate risk has been relatively rewarding to ETF advisors and investors thus far in 2024. The iShares Broad USD High Yield Corporate Bond ETF (USHY ) had a year-to-date total return of 3.6% as of July 8. This was stronger than the 1.4% gain for the iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB ).
Meanwhile, the less interest-rate sensitive iShares Short Treasury ETF (SHV ) was up 2.6%, significantly outperforming the 4.3% decline for the iShares 20+ Year Treasury ETF (TLT ). The absence of any rate cuts in the 2024 has hurt those investors that took on duration.
”The income cushion bonds provide has increased across the board in a higher rate environment,” noted Wei Li, Global Chief Investment Strategist at the BlackRock Investment Institute. “We expect interest rates to stay higher for longer.”
Where Are Advisors Focusing Fixed Income Attention?
In late June 2024, VettaFi hosted a Mid-Year Market Outlook Symposium. In addition to hearing from industry experts, we asked advisor attendees some insightful questions. For example, we asked “Which fixed income sector looks most appealing to you for the remainder of 2024?”
The most popular answer was Investment-grade credit (31%) followed by Short-term Treasuries (25%) and High yield credit (23%). Longer-term Treasuries and Mortgages received less support in the VettaFi advisor data. This is different from when we asked a similar question in April. Then, high yield was in greater focus.
iShares Offers Different Investment Grade Corporate Bond ETFs
We highlighted the $14 billion IGIB above, but the ETF is not the largest investment-grade corporate bond ETF iShares offers. That honor goes to the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD ) with its $31 billion. There are some notable differences between LQD and IGIB that contributed to IGIB’s 150 basis points stronger year-to-date performance.
IGIB has the lower expense ratio of the pair (0.04% vs.0.14% for LQD) and the lower duration (6.0 years vs. 8.3 years). Both funds’ assets are concentrated in low-investment-grade bonds, but IGIB takes on more credit risk. IGIB had 51% of its assets in BBB-rated securities compared to LQD’s 45%. IGIB was also the more popular BlackRock ETF to purchase thus far in 2024 gathering $1.3 billion of new money.
While widely followed by retail and institutional investors, LQD is not the largest investment-grade corporate bond ETF. That distinction goes to the Vanguard Intermediate Term Corporate Bond ETF (VCIT ).
Vanguard and State Street Global Advisors Bond Offerings
The $46 billion VCIT was up 1.2% to start the year and pulled in $1.7 billion. Like IGIB, VCIT has a 0.04% expense ratio. The Vanguard fund’s average duration of 6.0 years and 52% of recent assets in BBB-rated bonds makes choosing between the two a challenge. Meanwhile, both ETFs trade on average over 1 million shares a day, though VCIT trades more.
The SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB ) is another strong, high-quality bond ETF. The $8.5 billion fund also charges a 0.04% expense ratio, and SPIB was up 1.7% thus far in 2024. While its 50% stake in BBB rated bonds is like IGIB and VCIT, the bigger difference for the State Street Global Advisors’ fund is with its interest-rate sensitivity. SPIB had an options-adjusted duration of just 4 years.
For advisors focused on investment-grade corporate bonds, it pays to look inside the ETF.
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