With stocks on a blistering pace to conclude 2023, familiar valuation concerns are again part of the conversation. So intense has been the recent rally that some experts argue equities are currently priced to perfection. It remains to be seen if that thesis is accurate. But it is clear that bonds are currently offering more value than stocks.
However, that value opportunity set isn’t uniform across the fixed income space. That indicates investors need to be selective about how they access it. The VanEck Moody’s Analytics IG Corporate Bond ETF (MIG ) is an example of a fund that helps income investors zero in on value in the corporate bond space.
MIG follows the MVIS Moody’s Analytics US Investment Grade Corporate Bond Index. That benchmark’s methodology is relevant. It focuses not only on investment-grade debt, but on corporate bonds seen as offering good value.
Bonds ETF MIG Meaningful in This Environment
MIG sports a 30-day SEC yield of 5.38% and is home to 241 bonds. The fund could be alluring for income investors in 2024 for multiple reasons.
“Our U.S. rate strategy team, they’ve recently gone tactically neutral on government bonds as the markets have repriced quickly, maybe a bit too quickly,” noted Serena Tang, Morgan Stanley’s global head of cross-asset strategy. “Now, that being said, on a strategic horizon, my team and I have been arguing for a strong preference for high quality fixed income over higher beta assets going into 2024.”
MIG features other perks. For example, the ETF’s modified duration is 6.61 years. That’s intermediate-term territory. And that’s high enough to offer leverage to declining interest rates while potentially providing more diversification in equity-heavy portfolios than some long-dated bonds offer.
As for credit risk, more than 82% of MIG’s holdings are rated A or BBB. That indicates default risk is relatively low with the ETF. That’s something to consider at a time when default rates are ticking higher. As 2024 unfolds, MIG offers the possibility of performing as well as or better than broader equity strategies.
“Equities rates, credit, all these markets are just very relieved there is no more policy tightening. But in 3 to 6 months going into that first Fed cut, that’s when you see bonds outperform equities, investment grade bonds outperform lower quality and quality within equities outperforming as investors recognize that easing usually comes along with decelerating growth. And I think that moment of epiphany is still to come,” concluded Tang.
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