Focus on Corporates with iBoxx Investment Grade

06/15/2020 5:00 am EST

Focus: ETFS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

Our "Focus ETF" for June is iBoxx Investment Grade Corporate Bond ETF (LQD), which tracks an index of more than 1,000 investment-grade corporate bonds and earns favorable risk and reward scores from CFRA's forward-looking ETF ratings, observes analyst Todd Rosenbluth, in CFRA Research's flagship newsletter, The Outlook.

The Federal Reserve's efforts to provide liquidity to the credit markets has included purchasing ETFs, but the government's purchase of less than $2 billion leaves a lot for traditional investors.

We think most of the purchasing has stemmed from investors’ improved psychology and interest in diversified income provided by investment-grade corporate issuers.

LQD sports a 2.7% 30-day SEC yield by investing in bonds with strong credit profiles. In late May, 46% of assets were in bonds rated BBB or equivalent, with 42% in Arated securities and 10% rated higher than A. The index behind LQD is reconstituted monthly to incorporate new issuance, but also to remove securities no longer investment-grade.

Due to the impact of Covid-19, a higher-than normal number of issuers could be downgraded to speculative-grade ratings in 2020. Yet, iShares portfolio managers have the flexibility to both sell securities ahead of the rebalance or hold on to a small percentage of them following the downgrade.

The fund's average recent duration of 9.4 years is elevated relative to many fixed income ETFs but is less of a concern to CFRA given the currently low interest rate environment. The Federal Reserve is unlikely to raise interest rates, in our view, given rising unemployment and slower consumer spending.

The fund traded 13 million shares on average in the past month, confirming that investors large and small can execute trades throughout the day without liquidity concerns.

CFRA's rates nearly 400 fixed income ETFs based on a combination of holdings-level analysis and fund metrics. LQD earns its five-star rating for its combination of risk, reward, and costs. We think the fund provides stable income, through high quality credits, in a low-cost liquid product.

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