with the launch of four new products which aim at giving investors new options for fixed income exposure.
These ETFs look to focus on global corporate bonds with maturities in 2016, 2018, 2020 and 2023 while charging 10 bps in fees a year. Each fund will comprise U.S.-dollar denominated, investment-grade corporate debt from both U.S. and non U.S. issuers with at least $250 million in outstanding face value.
The new ETFs would face severe competition from the roster of Guggenheim’s BulletShares ETFs, which cost investors 24 bps in fees and expenses, and also from some other popular corporate bonds ETFs. Hence, the pursuit of success could turn out to be difficult.
Nevertheless, the firm’s recent launch of four target-date maturity corporate bond ETFs with similar maturities have gathered about $200 million so far. Though these funds are investment grades, these do not include bonds issued by financial institutions.
For those investors seeking new plays on target-date corporate bonds, we have highlighted the new iShares launches below.
iShares Bond 2016 Corporate Term ETF (IBDA)
This ETF looks to track the Barclays 2016 Maturity Corporate Index and holds 173 securities in its basket. Bonds from industrials and financial institutions comprise at least two-fifths of the share in the basket each.
In terms of holdings, Blackrock FDS III takes the top spot with 6.89% followed by JPMorgan Chase and Goldman with 3.14% share each. The product looks to have average maturity of 2.25 years and effective duration of 2.17 years.
This new fund looks to follow an approach similar to that of Guggenheim’s BulletShares 2016 Corporate Bond ETF (BSCG), which has amassed $261 million in its asset base. With holdings of 234 securities, BSCG has an average maturity of 3.13 years and effective duration of 2.92 years.
Apart from the defined-maturity ETFs, there are a couple of choices in the investment grade corporate bond ETF space targeting short-term maturities (read: Are Short Term Bond ETFs the New Safe Haven?).
The most popular is the Vanguard Short-Term Corporate Bond ETF (VCSH), which charges a slightly higher fee of 0.12% from investors. The average maturity is 3.20 years and effective duration is 3 years. The fund has an impressive AUM of over $6.2 billion.
iShares Bond 2018 Corporate Term ETF (IBDB)
This ETF looks to track the Barclays 2018 Maturity Corporate Index and holds 183 securities in its portfolio.
The fund is widely diversified across its holdings with none of the bonds making up for more than 3.55% of total assets. Industrial bonds dominate half of the fund’s return while financial institutions make up for nearly 36% share. This mix results in a portfolio which has average maturity and effective duration of 4.22 and 3.86 years, respectively.
Its direct competitor, the Guggenheim BulletShares 2018 Corporate Bond ETF (BSCI) focuses on investment-grade corporate bonds with effective maturities in the year 2018. With AUM of nearly $105 million, the product has an average maturity of 5.08 years and effective duration of 4.42 years.
The other popular corporate bond ETF that might compete with IBDB is iShares Barclays Intermediate Credit Bond Fund (CIU). The fund zeros in on U.S. investment grade bonds having average maturity of 4.89 years and effective duration of 4.29 years. It is also a popular ETF with AUM of $6.0 billion while charging 20 bps in annual fees.
iShares Bond 2020 Corporate Term ETF (IBDC)
This ETF looks to track the Barclays 2020 Maturity Corporate Index, holding 126 bonds in the basket. Bonds from Morgan Stanley, Blackrock FDS III and JPMorgan Chase occupy the top three positions in the basket with a combined 9% share.
From a sector look, industrials take the top spot with roughly three-fifths share, while financial institutions make up for 30% share in the basket. The fund has average maturity of 6.09 years and effective duration of 5.16 years (read: QE Tapering Could Make These Bond ETFs Winners).
In comparison, BulletShares 2020 Corporate Bond ETF (BSCK) has managed assets worth $45.6 million with effective maturity and duration of 7.19 years and 6.04 years, respectively.
The other popular ETF – Vanguard Intermediate-Term Corporate Bond ETF (VCIT) – targets the intermediate end on the yield curve with a weighted average maturity of 7.60 years. The fund is subject to moderate levels of interest rate risk as indicated by a weighted average duration of 6.60 years. The ETF charges 12 bps in annual fees and has accumulated over $3.2 billion in its asset base.
iShares Bond 2023 Corporate Term ETF (IBDD)
This ETF looks to track the Barclays 2023 Maturity Corporate Index and holds 195 securities in its basket. Industrial takes the top spot with roughly three-fifths share while financial institutions make up for 24% share in the basket.
In terms of holdings, Blackrock FDS III takes the top spot with 3.50% followed by JPMorgan Chase and General Electric with 4.7% share each. The product looks to have average maturity of 9.09 years and effective duration of 7.67 years.
For competitors, the list is quite impressive as there is a wide range of funds focusing on the long end of the curve. The most popular in the space is iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) with an asset base of $19.4 billion. Holding 1,067 securities, the fund has average maturity of 11.75 years and effective duration of 7.53 years. LQD charges investors 15 basis points in fees and expenses.
How do these fit in a portfolio?
These products are interesting choices for investors who wish to avoid stock market volatility while at the same time ensure a steady stream of cash flow from their portfolio. These will also create laddering possibilities for investors seeking to retain targeted exposure to the bond market.
These products can also be great picks for investors seeking to match assets with liabilities, in order to have capital ready for a big purchase a few years from now.
While the funds are generally cheaper than their ‘regular’ bond counterparts in terms of expense ratios due to their lower portfolio rebalancing and turnover, these can incur wide bid-ask spreads thanks to the low trading interest. This can thereby increase the total cost of investing, although this depends on securities bought and the size of the fund in question.
Moreover, high quality corporate bonds provide a big increase in yields when compared to Treasury bonds, with only a slight increase in risk. Due to solid balance sheets and high cash levels of the investment grade corporates, the chances of default are minimal.
Thus, the investment-grade corporate bonds can be considered pretty safe as far as credit risk is considered. Further, if the global economic situation worsens causing further “flight to quality”, the investment grade bonds will suffer less (read: Bond ETFs Experience Massive Outflows).
Given this, it seems that the new iShares targeted corporate bond ETF will perform favorably in terms of investor interest. And if it can manage to generate a decent yield and stable returns, it won’t be too hard to see big inflows from this solid addition to the iShares’ bond line-up.
This article is brought to you courtesy of Eric Dutram.