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With two interest rate hikes already under the Federal Reserve’s belt and more on the way as the central bank seeks to damp inflation, 2022 is proving to be a brutal year for fixed income investors.
Corporate bonds, both investment-grade and junk, aren’t immune. However, there is some evidence that investors are again nibbling at corporate debt, and that could be a positive for the related exchange traded funds, including the Franklin Liberty Investment Grade Corporate ETF (FLCO).
FLCO, which turns six years old in October, is actively managed and attempts to outperform the Bloomberg US Corporate – Investment Grade Index. Moreover, FLCO could be at the right place at the right time as investors are showing signs of revisiting corporate bonds.
“That is a reversal from earlier in the year, when investors sold off even the highest-quality debt. The turnaround highlights the tensions pressuring financial markets. In recent weeks, investors have grown more confident about the Federal Reserve’s path for raising interest rates to wrangle inflation—and more worried that, as a result, growth has begun to slow,” reported Matt Grossman for the Wall Street Journal.
One reason investors may be reconsidering corporate bonds today is the point that while the Fed is raising rates, real yields are still low. FLCO is relevant in that conversation because the ETF sports a 30-day SEC yield of 3.92%, according to issuer data. That’s well above what investors earn on 10-year Treasuries and most aggregate bond funds.
“The debt of U.S. companies with relatively strong financial profiles is offering investors yield premiums, or spreads, of about 1.31 percentage points greater than what Treasurys offer, according to index data from Bloomberg. That number was as high as 1.49 percentage points a couple of weeks ago, but it has edged down as more investors seize on corporate debt as an alternative to the swooning stock market,” according to the Journal.
The $882.11 million FLCO holds 158 bonds and has an average duration of 7.42 years, which is below the benchmark and puts the fund in intermediate-term territory. FLCO offers some ex-U.S. exposure, as domestic issues account for two-thirds of the fund’s portfolio. On the basis of geography, FLCO is far more diverse than its benchmark. More than 88% of FLCO’s holdings are rated A or BBB, indicating that credit risk with this ETF isn’t significant.
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