ETF Investors Clamor For Corporates

Fixed income exchange traded funds were the toast of the town in September and that theme is continuing in October as each of the top four asset-gathering ETFs to this point in the month are bond funds and three of those four are corporate bond ETFs.

The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, the largest corporate bond ETF, has hauled in over $937 million in new assets this month, but that is less than half the $1.77 billion added by the SPDR Barclays High Yield Bond ETF JNK. Flows to LQD and JNK, the second-largest junk bond ETF, confirm investors are embracing corporate bond funds of all stripes.

This month's inflows to JNK and rival high-yield corporate bond ETFs are a reversal in trend from what was seen in September.

“As the market was in a risk off mode throughout September, high yield experienced $928 million of outflows. High Yield spread levels are now at their highest in 3 years – at nearly 630 basis points – meanwhile, expected defaults remain below historical averages,” said State Street Global Advisors Vice President Dave Mazza in a recent note.

A sticking point for investors considering corporate bond ETFs, particularly the high-yield variety, has been speculation that the Federal Reserve is close to raising interest rates. Traditional junk bond ETFs feature durations that are high enough to make the funds vulnerable to rising rates. Duration measures a bond's sensitivity to changes in interest rates.

The $4.1 billion SPDR Barclays Short Term Corporate Bond ETF SCPB helps investors looking for a basket of high-grade corporates ameliorate the duration quandary. SCPB, which has a 30-day SEC yield of 1.65 percent, features a modified adjusted duration of just 1.97 years, according to State Street data.

“With certain risky assets under pressure, investors put money to work in aggregate and treasury funds. Investors deposited $502 million into corporate bonds, a reversal of the six month trend,” noted Mazza.

SCPB has added nearly $226 million in new assets since the start of this month. Increasing the allure of SCPB is its credit quality, particularly at a time when market participants continue to ponder increased default rates by junk-rated issuers from the energy sector.

SCPB, which tracks the Barclays U.S. 1-3 Year Corporate Bond Index, allocates nearly 63 percent of its combined weight to bonds rated Aa or A. Home to over 1,110 high-grade corporate bonds, it has scant exposure to the energy and materials sectors. None of SCPB's corporate holdings exceed a weight of 0.95 percent and the bulk of the ETF's largest holdings are issued by financial services and technology companies.