Income investors seeking competitive yields without taking excessive risk may find corporate bond ETFs attractive as the Fed started lowering interest rates and an economic soft landing appears achievable.
In the last two years, investors have enjoyed high-yielding money market funds and short-term Treasury securities. But as these yields begin to fall with cooling inflation, exchange-traded funds investing in corporate debt can be a smart alternative.
In this article, we provide a primer on corporate bond ETFs, as well as the pros and cons of investing them and a breakdown comparing corporate bonds to Treasuries bonds.
What Is a Corporate Bond ETF?
A corporate bond ETF is an exchange-traded fund that tracks either passively tracks an index basket of corporate debt securities or actively attempts to outperform an index benchmark. This makes these bond funds an accessible way for investors to gain exposure to the corporate bond market without having to buy individual bonds.
Corporate bond ETFs can target specific sectors (e.g., financials or industrials), credit quality (investment-grade or high-yield bonds), or maturities (short-term or long-term). This flexibility makes them appeal to a wide range of investors.
5 Top Corporate Bond ETFs by AUM
|
Ticker |
Fund |
Expense Ratio |
AUM |
SEC Yield |
|
VCIT |
Vanguard Intermediate-Term Corporate Bond ETF |
0.04% |
$51.1B |
4.66% |
|
VCSH |
Vanguard Short-Term Corporate Bond ETF |
0.04% |
$35.7B |
4.29% |
|
LQD |
iShares iBoxx $ Invmt Grade Corp Bd ETF |
0.14% |
$30.7B |
4.73% |
|
JPST |
JPMorgan Ultra-Short Income ETF |
0.18% |
$26.1B |
4.90% |
|
IGSB |
iShares 1-5 Year invmt Grd Corp Bd ETF |
0.04% |
$21.1B |
4.35% |
Data as Oct. 4, 2024.
Pros and Cons of Corporate Bond ETFs
When considering corporate bond ETFs as part of an investment strategy, it's important to weigh their benefits and potential drawbacks. These ETFs offer diversified exposure to the corporate bond market, providing income and accessibility for investors. However, like any investment, they come with specific risks, including interest rate sensitivity and credit risk.
Pros
Cons
Corporate Bonds vs. Treasury Bonds: A Comparison
Investors may choose between investing in corporate bonds or Treasury bonds (through ETFs or directly). Here’s how the two compare:
Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital, and when investors purchase these bonds (through ETFs or individually), they essentially lend money to the companies in exchange for regular interest payments (coupons) and the return of the bond's face value at maturity.
Treasury Bonds
Treasury securities are debt instruments issued by the U.S. Department of the Treasury to finance government spending. These securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
Treasury securities come in various forms, including Treasury bills (short-term), Treasury notes (medium-term), and Treasury bonds (long-term), each with different maturities and interest rates. They pay periodic interest and return the principal at maturity, making them a popular choice for risk-averse investors seeking stability.
Key Takeaways on Corporates vs. Treasuries
For those seeking a balance between yield and safety, a diversified portfolio including both corporate and Treasury bond ETFs may provide the best of both worlds.
Corporate Bond ETFs in 2024 and 2025
In a falling rate environment, corporate bond ETFs can provide a good alternative to high-yield money market funds and short-term Treasury securities, as interest rates for the latter tend to fall in this environment.
However, should economic conditions deteriorate further than expected, and a recession ensue, corporate bond ETFs with greater credit risk, such as junk bond funds, can experience price declines.
Thus, for cautious investors that want to invest in corporate bond ETFs, investment grade or higher credit quality can be a more suitable choice.
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