Get In The Middle With Corporate Bonds

Yes, 2019 is still in its early stages, but for all the concerns about the state of the U.S. investment-grade corporate bond market heading into this year, that universe is off to a solid start.

The Markit iBoxx USD Liquid Investment Grade Index, one of the most widely followed gauges of domestic investment-grade corporate debt, is higher by nearly 3 percent.

What Happened

With expectations in place that the Federal Reserve will slow its pace of interest rate hikes or not boost borrowing costs at all this year, some fixed income investors may revisit longer-dated bonds. For those looking to increase duration exposure without going all the way to long-term bonds and the related exchange traded funds, intermediate-term bond funds are adequate substitutes.

In the investment-grade corporate bond universe, that includes the Vanguard Intermediate-Term Corporate Bond ETF VCIT. VCIT is CFRA Research's focus ETF for the month of February.

Why It's Important

Last month fixed income investors “gravitated toward intermediate-term bond strategies -- those investing in bonds with maturities between three and ten years – in contrast to short (1-3 years) and ultra-short (less than 1 year) term products that were more popular in 2018 as the Federal Reserve hiked rates multiple time,” said CFRA's Director of ETF & Mutual Fund Research Todd Rosenbluth in a note released Monday.

Home to $18.2 billion in assets under management at the end of last year, VCIT is one of the largest corporate bond ETFs of any maturity range. The fund holds over 1,700 bonds with an average duration of 6.1 years. The average effective maturity on VCIT's holdings is 7.3 years.

“As CFRA’s Investment Policy Committee noted on January 9, the news out of the December 20 policy statement was the shift in language and reflected the more dovish tone coming out of the Fed, underscoring a new patient stance,” said Rosenbluth. “Given the macroeconomic environment, investors were willing to incur additional interest rate sensitivity in exchange for healthier yields.”

VCIT yields 3.6 percent, just below the yield on the Markit iBoxx USD Liquid Investment Grade Index.

What's Next

“As of January 29, VCIT was the second most popular bond ETF, pulling in $2.5 billion and increasing its asset base to $21 billion; bond ETFs collectively added $13 billion to start 2019,” said Rosenbluth. “This ETF seeks to track the Bloomberg Barclays US 5-10 Year Corporate Bond Index and the fund is highly diversified with more than 1,700 holdings.”

CFRA has an Overweight rating on VCIT. The fund charges just 0.07 percent per year, making it cheaper than 91 percent of competing strategies.

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