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Sunday, February 20, 2011

Diversified Approach to Play Corporate Bond ETFs

As strength of a sustainable economic recovery continues to remain wary, unemployment remains high, and consumer demand grows at a snail’s pace, corporate bonds, and the exchange-traded funds (ETFs) that track them, could pose an opportunity for investors.

A notable play of the corporate bond market is the SPDR Barclays Capital International Corporate Bond ETF (IBND), which tracks the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, carries an expense ratio of 0.55%, and gives investors exposure to debt that's denominated in local currencies.

IBND focuses on investment-grade corporate bonds and gives exposure to the following currencies: Euro, Australian Dollar, Canadian Dollar, New Zealand Dollar, British Pound, Japanese Yen, Swiss Franc, Swedish Krona, and the Danish and Norwegian Krone. Although IBND excludes US Dollar-denominated bonds, it does include bonds issued by US companies, which are payable in other currencies. In fact, according to the fund’s prospectus, the US has the largest country weighting at 17.5%, followed by Germany at 16.1% and the United Kingdom at 12.5%.

In regards to sector weightings, IBND is heavily focused on financials, industrials, and utilities, which constitute 46.9%, 39.5%, and 11.6% of its asset base, respectively. Additionally, the underlying index that IBND seeks to track boasts a yield of 3.05%, which can be expected if IBND tracks its underlying index accurately.

Of the holdings in the newly traded ETF, all the bonds in the fund are rated Baa or higher, with nearly half of them carrying a rating of A or better. The average maturity for the bonds is 5.3 years with a modified duration of 4.4 years.

Another notable mention regarding the international bond market is that PowerShares has also filed the necessary paperwork to launch the International Corporate Bond Portfolio (PICB), which will seek to replicate the performance of the S&P International Corporate Bond Index and give exposure to international corporate bonds.

Another way to play corporate bonds is through the Vanguard Short-Term Corporate Bond Index Fund (VCSH). This ETF seeks to replicate the Barclays Capital US 1-5 Year Corporate Index, a benchmark that includes US dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies with maturities between one and five years

The majority of VCSH’s coupon rates lie between 4% and 6% and debt ratings of underlying holdings primarily lie between BBB and AA.

Although an opportunity may prevail in corporate bond ETFs, it's a good idea to have an exit strategy that helps mitigate the risks that they carry.

Disclosure I do not any of the above mentioned etfs I however have been watching IBND for a bit.

1 comment:

  1. I consider investment grade corporate bond funds safer than government bond funds.