A Solid Rating For This Bond ETF

Among the most popular destinations this year in the world of fixed income exchange traded funds are those funds with low and ultra-low durations. The SPDR Portfolio Short Term Corporate Bond ETF SPSB is one of those funds.

SPSB follows the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index, a benchmark of short-term, investment-grade domestic corporate bonds.

What Happened

The Federal Reserve raised interest rates three times this year and a fourth hike is widely expected to be delivered later this month. The Fed's rate hiking trajectory is prompting investors to embrace lower duration bonds and the related ETFs. SPSB has an option-adjusted duration of 1.85 years, according to issuer data.

“The fund's duration is slightly shorter than its category peers,” said Morningstar in a recent research note. “As of November 2018, it measured 1.8 years compared with the category average of 1.9 years. This difference is small. The fund will likely respond to rate movements in a similar way to its peers.”

SPSB holds 1,145 bonds with a minimum of $300 million of par outstanding.

Why It's Important

As is the case with many corporate bond ETFs, SPSB is heavily allocated to bonds issued by financial services companies. That's a result of major U.S. banks using the low interest rate environment to issue massive amounts of debt to meet stricter capital requirements following the global financial crisis. Bonds issued by financial services firms represent nearly 44 percent of SPSB's roster.

“Since 2010, they have issued a record amount of debt to take advantage of low rates and meet strict postcrisis capital requirements,” said Morningstar. “At the end of 2016, the total outstanding debt issued by the financial-services sector stood at $1.6 trillion. Consequently, market-cap-weighting steered the fund toward A and BBB rated financial institution bonds.”

SPSB's nine-year track record indicates the fund slightly lagged the category average, but was less volatile than rival ETFs.

“From inception through November 2018, the fund's annualized return of 1.8% kept pace with the category average, lagging by 0.2% per year. But its lower risk profile paid off,” according to Morningstar. “This fund's risk-adjusted return, as measured by Sharpe ratio, landed near the top quartile of its category during the same period.”

What's Next

SPSB has a 30-day SEC yield of 3.5 percent, which is likely enticing for some income-starved investors.

Just over 43 percent of SPSB's holdings are rated BBB, the corner of the corporate bond market that has recently come under scrutiny because some analysts are forecasting a raft of downgrades to junk territory in 2019 for bonds currently residing in the BBB spectrum.

Morningstar has a Bronze rating on SPSB.

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