We have seen some smaller outflows in the largest Investment Grade Corporate Bond linked ETF in the U.S. listed universe, LQD (iShares iBoxx $ Investment Grade Corporate Bond, Expense Ratio 0.15%, $30.3 billion in AUM) this week to the tune of about $200 million.
While these are not huge flows in the context of the overall AUM in LQD, the fact that they are occurring at the same time as we are seeing larger liquidations in the High Yield Corporate Bond space, specifically via both HYG (iShares iBoxx $ High Yield Corporate Bond, Expense Ratio 0.50%) and JNK (SPDR Barclays Capital High Yield Bond, Expense Ratio 0.40%), makes us pay some attention here.
In fact, both HYG and JNK have seen over $1 billion and $370 million flow out respectively this week alone, leading all ETPs in net outflows in the short term.
Bonds have gotten hit rather hard in the past four or five trading sessions amid a bump in interest rates and talk of a likely March rate hike. The FOMC next meets on March 14th and 15th next week, and near certain odds of a rate bump have caused the recent move.
Fixed Income ETF portfolio managers have responded by selling into the recent pressure in bond prices, notably in both the High Yield and Investment Grade Corporate spaces, as we have witnessed this week.
Speaking of Investment Grade Corporate Bonds and rising interest rates, this gives us an opportunity to highlight two “Interest Rate” hedged products in the space that may very well catch attention given this environment. IGHG (ProShares Investment Grade Interest Rate Hedged, Expense Ratio 0.30%, $218 million in AUM) debuted back in 2013, but it has attracted short term inflows with more than $62 million entering the fund just year-to-date. To compete here, iShares launched LQDH (iShares Interest Rate Hedged Corporate Bond, Expense Ratio 0.25%) in 2014, and while this fund is considerably smaller than IGHG at $51.8 million in assets under management presently, it has a similar motive.
Fund literature on IGHG suggests it “Seeks to mitigate the risk of rising interest rates through a built-in interest rate hedge using U.S. Treasury futures,” and “Targets a duration (interest rate sensitivity) of zero.”
LQDH fund literature states “Holds shares of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and short positions in interest rate swaps,” and furthermore “Actively managed to a rules based strategy that seeks to mitigate interest rate risk” and “Use to manage interest rate risk or express a view on credit spreads.”
The iShares IBoxx $ Investment Grade Corporate Bond Fund (NYSE:LQD) was trading at $115.82 per share on Thursday afternoon, down $0.53 (-0.46%). Year-to-date, LQD has declined -1.16%, versus a 5.93% rise in the benchmark S&P 500 index during the same period.