Bond Fund Offers Enhanced Stability

As part of our series on bond exchange-traded funds (ETFs), this article highlights a large bond fund, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), that traditionally offers investors more stable returns than many funds that also focus on non-U.S. government bonds.

As its name suggests, the iShares iBoxx $ Investment Grade Corporate Bond ETF invests only in highly rated, safe U.S. corporate bonds. The issuers of these bonds are big, blue-chip U.S. companies, including those in the Dow or the S&P 500 indexes.

Naturally, this focus means that the bond yields are not likely to be as high as investors could find by chasing higher payouts from riskier companies. But the asset value of the LQD bond fund is comparatively more stable. The ticker symbol, LQD, seems to be an appropriate way to convey the liquidity of these assets.

The yield for this fund is about 3.5%, so it pays more than the average U.S. government bond. But LQD is not likely to match the returns that can be pursued from riskier assets during bull market conditions. Still, this fund offers more protection than many others. To that end, safety often is a primary goal of bond investors.

The expense ratio for this fund is 0.15%. It has gained 2.64% over the past 12 months, and net assets total around $31.3 billion. The chart below shows the modest movement in the fund’s price resulting from the decreased demand for bonds in times of market surges.

The top bond issuers of this fund are all household names. Those companies and their weightings in the fund are: Verizon Communications Inc. (VZ), 3.02%; JPMorgan Chase & Co. (JPM), 2.94%; AT&T Inc. (T), 2.81%; Goldman Sachs (GS), 2.70%; and Bank of America Corp. (BAC), 2.50%.

As you might expect from this list, the most heavily represented sectors are banking, consumer non-cyclicals and communications. The fund holds many different bond issues from some of these issuers, resulting in a total of more than 1,750 positions, even though the number of companies involved is less than that.

If you’re looking for a relatively safe income-oriented investment with a little more potential for returns than U.S. government bonds, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) could prove to be of interest to you.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.