A Cheaper Investment Option To Play The Bond Boom

Last year wasn't a record year of inflows for exchange traded funds, but it was pretty close. Bond ETFs, however, did topple annual inflow records and with more advisors and investors turning to fixed income funds, more members of this asset deserve evaluation.

What Happened

One of the most popular destinations in the fixed income ETF is the aggregate fund, or those ETFs that are typically home to a massive number issues spread across various corners of the bond market. One of the most cost-effective options to consider is the iShares Core Total USD Bond Market ETF IUSB.

The $4.82 billion IUSB charges just 0.06% per year, or $6 on a $10,000 stake. Like many aggregate bond funds, IUSB is heavily allocated to U.S. government debt, which lowers credit risk.

“The benchmark index represents a union of the Bloomberg Barclays U.S. Aggregate Bond Index ('the Agg) with other sectors not represented in the Agg, like high-yield bonds,” said Morningstar in a recent note.

“The additional sectors are small relative to those already contained in the Agg, so there is a large overlap between this fund and the Agg. The inclusion of corporate debt rated below investment-grade enables the fund to generate higher yields and hold on to bonds that are downgraded to junk from investment-grade ('fallen angels'), which may be temporarily undervalued because of concentrated selling pressure from investment-grade managers.”

Why It's Important

IUSB checks some other important boxes for investors. First, its duration of 5.28 years puts it intermediate-term category, a popular bond frontier today. Second, the fund holds almost 9,000 issues, good for one of the deepest benches among all fixed income ETFs.

“Although this strategy takes more credit risk than the Agg, it takes less credit risk than the Morningstar Core-Plus Bond category average,” said Morningstar. “Bonds rated below investment-grade represented less than 10% of the fund’s assets at the end of November 2019, about half the figure for the category average, while Treasury bonds carried twice the weighting here (35%) as they did in the category average.”

What's Next

IUSB's status as a cost-effective, intermediate-term bond fund approachable for novice investors are among the factors that should see the fund gain assets this year. Lack of domestic interest rate risk will help as well.

Morningtar upgraded the fund to Gold, its highest ETF rating, from Silver.

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