What's the idea?
As we said previously, an acceleration in the rate of inflation reduction could start as early as the first half of 2023. The realisation of this forecast would push the US Federal Reserve to ease monetary policy, which would ultimately have a positive effect on stock and debt markets. In order not to miss the start of the rate cuts and to participate in the bond rally, we suggest gradually gaining positions in funds that specialise in corporate bonds and can show good yields during the market recovery.
We have selected two exchange-traded funds that can show good returns during the market recovery:
- iShares Long-Term Corporate Bond ETF
- iShares iBoxx $ High Yield Corporate Bond ETF
The iShares Long-Term Corporate Bond ETF (IGLB.US) invests in US dollar-denominated, investment-grade US corporate bonds (rated Baa+ by Moody's, BBB- by S&P and Fitch or higher) with maturities greater than 10 years. Issuers of such bonds have a lower risk of default, but lower yields.
Why do we like iShares Long-Term Corporate Bond ETF?
Purchasing an ETF with an allocation to long-dated corporate bonds will offer good returns during a market recovery. In addition, the Long-Term Corporate Bond ETF has a low risk profile relative to other bond ETFs, as it only buys investment-grade with an extremely low probability of default in its portfolio.
A brief description of how bonds work
Bondholders not only earn a fixed yield on coupon payments, but also have the opportunity to boost their capital if the bond’s market value increases. A bond’s market price and the interest rate are inversely related. In other words, an increase in the interest rate will reduce the market value of a bond and vice versa. An important parameter in this relationship is duration (weighted average payment flow term), which reflects the extent to which interest rate changes affect a bond's value. Prices of bonds with low duration react weakly to interest rate changes, while prices of bonds with a long maturity and correspondingly high duration show high volatility in response to rate fluctuations. Roughly speaking, duration reflects a bond's degree of risk in terms of maturity length.
Key ETF metrics:
- Assets under management: $1.41 billion
- size: 1x
- Number of stock names in the ETF: 3 424
- Effective duration: 12.96 years
- Weighted average maturity: 22.67 years
- Average yield to maturity: 5.53%
- Cost ratio: 0.06%
- dividend yield: 4.51%
- YTD yield: -25.39%
- Yield since January 2010: 5912%
- Average annual growth, adjusted for inflation, since 2010: 112%
Issuers with the highest allocation to ETFs:
- AT&T INC — 2.03%
- COMCAST CORPORATION — 1.62%
- VERIZON COMMUNICATIONS INC — 1.48%
- ORACLE CORPORATION — 1.31%
- APPLE INC — 1.30%
Distribution by sector/industry:
- Consumer, non-cyclical — 18.62%
- Communications — 11.53%
- Electricity — 11.09%
- Technology — 9.02%
- Energy — 8.51%