An Inexpensive Bond ETF For August

Fixed-income exchange-traded funds set a blistering pace of asset gathering in the first half of 2017, easily positioning the asset class to top 2016's record inflows. Bond ETFs' torrid asset-gathering acumen this year comes even as the Federal Reserve has raised interest rates twice with many bond market observers believing a third rate hike will arrive before the end of the year.

The ideas of another rate hike this year and up to three in 2018 has many bond investors considering short-term, lower duration bond funds, including the iShares Core 1-5 Year USD Bond ETF ISTB. The iShares Core 1-5 Year USD Bond ETF is CFRA Research's focus ETF for the month of August.

“ISTB tracks a Bloomberg Barclays short-term bond index that has a mix of government, corporate and agency bonds. From a credit perspective, more than 90 percent of assets are in investment-grade issues, but there are small stakes in BB and B rated securities,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “In the investment-grade rating categories, ISTB is diversified between higher investment-grade bonds (65 percent are rated AA or higher) and lower investment-grade bonds (24 percent in A or BBB).”

ISTB In-Depth

The $1 billion ISTB, which turns five years old in October, holds about 2,500 bonds. ISTB has an effective duration of just under 2.8 years. Duration measures a bond's sensitivity to changes in interest rates.

“CFRA also looks at the interest rate sensitivity of all bond ETFs it ranks. ISTB's ranking is helped by its below-average duration of 2.7 years. This compares favorably to many other investment-grade bond ETFs,” added Rosenbluth.

In exchange for the ETF's lower duration, investors have to deal with ISTB's 30-day SEC yield of less than 2 percent. Higher yields can be found with investment-grade and junk-rated corporate bonds.

An Affordable Option

Scores of bond ETFs offer investors favorable expense ratios and ISTB is part of that theme. The ETF charges just 0.08 percent per year, or $8 on a $10,000 investment. That is well below average for short-term investment-grade bond funds in ISTB's Lipper peer group.

“ISTB currently has no negative inputs at this point. For investors seeking a short-term bond ETF, we think ISTB is a strong candidate for a diversified portfolio,” said Rosenbluth.

CFRA has an Overweight rating on ISTB.