The Markit iBoxx USD Liquid Investment Grade Index is essentially flat since the start of 2024. While that trails the slight gain notched by the Bloomberg U.S. Aggregate Bond Index, some experts believe investment-grade corporate bonds remain an opportunity-rich corner of the fixed income market.
Should that thesis be validated, it could boost exchange traded funds such as the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG). Broadly speaking, in the first half of 2024, corporate debt outperformed Treasurys. However, much of that gap was attributable to riskier corners of the corporate bond market. Those include bank loans and other high-yield fare.
Where things get interesting for investment-grade options such as SFIG is that credit spreads are narrowing. This is implying junk-rated corporates are offering less cushion for the added risk. One takeaway from that is there are hurdles facing lower-quality corporate bonds when it comes to notably outperforming U.S. government debt. However, such headwinds might not be applicable to SFIG.
Evaluating SFIG’s Near-Term Potential
Bond’s should be viewed as long-term investments. That’s true of SFIG, it could hold some near-term allure particularly when yields remain enticing on investment-grade corporates.
“Investment-grade corporate bonds remain attractive given their average yields of 5% or more. We continue to suggest investors gradually extend duration with intermediate-term bonds, and investment-grade corporate bonds can make sense as investors can earn similar, or even higher, yields than with short-term alternatives,” noted Collin Martin of Charles Schwab.
For its part, SFIG, which turned eight years old in April, sports a 30-day SEC yield of 5%, according to issuer data. That’s impressive when considering more than 47% of the ETF’s holdings are rated AAA, AA, or A. It is perhaps even more appealing when accounting for an effective duration of just 2.64 years.
Downgrade Risk for SFIG’s Holdings Relatively Low
Further enhancing the allure of SFIG is the point that the U.S. economy is on solid footing, indicating default or downgrade risk for the ETF’s holdings is relatively low and with earnings growth trending the right way, companies have the resources with which to tend to outstanding liabilities.
“Corporate profits remain elevated, although the first quarter of the year saw a modest decline from the all-time high reached in the fourth quarter of last year. This corporate profit data comes from the Bureau of Economic Analysis and represents a high-level view of corporate profits—large and small companies, public and private, and those with high credit ratings, low credit ratings, or no credit ratings at all. But in aggregate, corporate profits are high,” concluded Martin.
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