Why investors are turning to corporate bond ETFs

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Nov. 20 2020, Updated 2:06 p.m. ET

Investors seeking exposure to investment grade or high yield corporate debt have increasingly been using fixed income ETFs, allowing them to get precise exposure to specific segments of the corporate bond market while gaining diversification. The over-the-counter nature of the bond market can make it difficult for most investors to build diversified portfolios, and ETFs can provide a more efficient way to transact. Here are several ways to play the corporate fixed income ETF space in your portfolio. As you can see, these segments have been growing along with the broader corporate bond market:

1. For exposure to investment grade corporate debt, we like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has grown by $2.55 billion over the past 3 years.

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2. For short-term U.S. investment grade corporate and non-corporate debt, the iShares 1-3 Year Credit Bond ETF (CSJ) is a potential solution. This was an especially popular investment in 2013 when fears of rising interest rates were top of mind for many investors. Over the past three years, investors have added $3.2 billion to the fund.

3. Those seeking shorter term investment grade bonds whose coupons adjust to changes in interest rates may want to look at the iShares Floating Rate Bond ETF (FLOT), which has seen $4 billion of inflows since August 2011.

4. For U.S. high yield corporate bond exposure, a potential solution is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). Despite the recent sell-off we have still seen over $2.9 billion come into this fund over a three-year period.

Market Realist – In the current scenario of low yields on U.S. Treasuries (TLT)(IEF) and rising geopolitical tension, corporate bond ETFs (AGG) can help increase income and even diversify away risk to a certain extent.

Large institutions are again investing in high yield (HYG)(JNK) bonds and are taking advantage of the recent sell-off, which has left the asset class attractively priced. According to Lipper, U.S. high yield funds saw retail cash outflows of $1.2 billion in the week ended September 17, 2014. As per Lipper’s estimates, high yield funds have seen a total retail-cash outflow of $4.5 billion in 2014, 54% of which came from ETFs.

Market Realist – The graph above shows the fund flows from high yield bond funds in the past three months. The segment looks attractively priced and could prove to be a good investment opportunity.

Read on to the next part of this series for the key takeaways for investors.

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