The year 2014 seems favorable for bond investing. Global shocks, high-beta pain, momentum sell-offs and meager economic growth have pushed investors to safe havens so far this year thereby raising the appeal for bond investing. Yields, especially the long-terms ones, have sharply fallen this year.
The bullish trend was truer in corporate and long-term bond segments. Thanks to the slow-but-steady wrap up of QE, the market is expecting the Fed to raise its short-term rates sometime in 2015 thus indicating volatility in the short-end of the curve even if rates rise at some point of time. This leaves long-term bonds as safer fixed-income bets as far as the rate hike issue is concerned.
On the other hand, corporate bond securities have been on tear this year, as these offer a nice mix between yield and safety which could be ideal in this environment. With minimal defaults especially those with high credit ratings and little prospect for an interest rate increase in the near term, these lower volatility securities could be an interesting way to put up with equity market volatility.
The entire set of corporate bond ETFs has returned smartly this year approaching almost double-digit gains while the S&P 500 Index has returned about 3.0% thus far. Thus, a look at the top-ranked ETF in the Corporate Bond space would be the best way to capture the uptrend and cater to investors seeking higher yields without too much extra risk.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the corporate bond space, we have taken a closer look at the top-ranked VCLT. This ETF has a Zacks ETF Rank of 2 or ‘Buy’ rating with a high risk outlook and is detailed below:
Long-Term Corporate Bond Index Fund (NASDAQ:VCLT)
This fund looks to track the Barclays US 10+ Year Corporate Index. This Index intends to measure mainly the performance of U.S. corporate bonds that have a maturity of 10 to 25 years. The corporate bonds have high investment grade rating as well. The fund charges an expense ratio of 12% which makes it a dirt cheap choice in the corporate bonds ETF space.
The ETF has managed as asset base of about $800 million which is invested in 1,267 bonds. Industrial bonds take the top spot in the portfolio with about 62.8% of focus followed by finance and Utilities. Maturity wise, more than 75% of the fund is targeted at bonds having 20–30 years of maturity.
The ETF targets the longer end on the yield curve with a weighted average maturity of 24.1 years. It is subject to high levels of interest rate risk primarily due to its long-term focus as indicated by a weighted average duration of 13.6 years. Also, in terms of credit risk, the ETF seems decently placed with investment grade bonds occupying 80% of the portfolio.
However, the ETF is an appropriate choice for investors seeking high yield. The ETF’s yield-to-maturity hovers around 4.7% (as of May 19, 2014). Year-to-date, VCLT has returned investors 9.15%. The fund has outperformed the return of total bond market funds like Core Total U.S. Bond Market ETF (ARCA:AGG) and PIMCO Total Return ETF (BOND). We currently give VCLT a Zacks ETF Rank of 2 or ‘Buy’ rating along with a High risk outlook.
Bottom Line
In short, with corporate America definitely approaching brighter days, corporate bonds can outdo several investment options this year. Especially corporate bonds like VCLT which have top-notch investment grades should not look behind, if the currently turmoil in the market stays for longer. We at Zacks have plenty of Buy-rated corporate bonds while no government bonds are presently top rated.
From a technical perspective too, VCLT is poised for further surge in the coming months. Its short-term moving average (9-Day SMA) is still comfortably above the mid and long terms (50 and 200-Day SMA), suggesting continued bullishness for this ETF.