It’s often said that an ounce of prevention is worth a pound of cure and that failure to prepare is preparing to fail. Folksy wisdom to be sure, but those sayings remain relevant today and are highly pertinent in the world of investing. Take the case of corporate bonds and related ETFs, including those with investment-grade exposures. Broadly speaking, 2024 has been kind to higher-quality corporate debt. While more of the same could materialize next year, it also makes sense to prepare for the possibility of negative credit events.
Not all ETFs in this category offer buffers against such events. But the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG ) and the VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB ) do. And that could be an indication these funds merit consideration with 2025 right around the corner.
Why Corporate Bonds ETFs MBBB, MIG Could Matter in 2025
There are no guarantees that negative credit scenarios will materialize en masse next year. But there’s also no denying MBBB and MIG could offer some protection should the economy slow. Some market observers believe that could happen and are forecasting significant slowdowns in hiring in 2026.
“The risk is that companies have now done all the hiring they need to do, meaning a slower job market going forward,” noted Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. “Even in their base-case, Morgan Stanley’s economists see job market growth slowing, adding just 28,000 jobs/month in 2026. And to give you a sense of how low that number is, the average over the last 12 months was 190,000. And so, the bear case is that the labor market slows even more, more quickly, raising the risk of recession and dramatically lowering bond yields, both of which would reduce investor demand for corporate bonds.”
Economic lethargy isn’t an automatic catalyst for credit downgrades, but MBBB and MIG focus on corporate debt with reduced probability of downgrades. That means the ETFs could stand tall on a relative basis should the economy cool over the next two years.
Most Obvious Risk for Credit?
Additionally, the value focus offered by MBBB and MIG is noteworthy at a time when some equities and some corners of the bond market appear richly valued.
“Of course, maybe the most obvious risk to Credit is simply valuation. Credit spreads in the US are near 20-year lows, while the US Equity Price-to-Earnings Multiples for the equity market is near 20-year highs,” added Sheets. “In our view, valuation is a much better guide to returns over the next six years, rather than say the next six months. And that’s one reason we are currently looking through this. But those valuations do leave a lot less margin for error.”
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