All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs

Failing to contain the coronavirus-led acute market rout by its crisis-era policy launch, the Federal Reserve announced on Mar 23 a fresh set of stimuli. The Fed said that the purchases of Treasury and mortgage securities that it approved a week ago are unlimited and that it would buy $375 billion in Treasury securities and $250 billion in mortgage securities this week, per an article published on Wall Street Journal.

Notably a week ago, the Fed slashed its benchmark rate to near zero and notified that it would purchase at least $700 billion in Treasury and mortgage securities (read: Must-Watch ETF Areas on 2nd Fed Rate Cut of 2020 & QE Launch).

Among other steps, the Fed confirmed it would buy investment-grade exchange-traded funds that track the corporate bond market, a first for the U.S. central bank. The Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds.

It’s a boon for the ETF market as this would inject “liquidity to the bond market and to ETFs,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

Fed Takes Care of the Growing Need for Cash

Liquidity is the need of the hour in the current scenario as financial markets went berserk in the past month. People are selling almost everything in order to hoard cash amid such trying times. Requirement for meeting daily expenses at the time of coronavirus-induced quarantine and lockdowns also strengthened the appeal for cash holding.

Stalling of operations put several corporate sectors in tight spot. Fears of rising corporate defaults are prompting investors to dump the space. As a result, highly-rated corporate bond ETFs also saw asset outflows. Investment-grade iShares iBoxx USD Investment Grade Corporate Bond ETF LQD saw about $825.9 million in assets draining out of the fund in March.

“The Fed is taking both sides of the market so people who need to raise cash can do so,” explained Steve Blitz, chief U.S. economist for TS Lombard. “All of this is to make sure that people who want to sell have a buyer,” as quoted on MarketWatch.

Though it is too early to predict how beneficial would the latest Fed move be for the investment-grade corporate bond ETFs over the long term, still we can expect some upswing in the space.

Against this backdrop, below we highlight a few investment-grade corporate bond ETFs. These ETFs jumped materially on the day of Fed announcement (see all Investment Grade Corporate Bond ETFs here).

SPDR Portfolio Long Term Corporate Bond ETF SPLB — Up 10.4% on Mar 23

The fund follows the Bloomberg Barclays (LON:BARC) Long U.S. Corporate Index. It is designed to measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. It charges 7 bps in fees and yields 4.70% annually (read: ETF Strategies to Play the Rising Virus-Induced Volatility).

Vanguard Long-Term Corporate Bond ETF VCLT — Up 9.8% on Mar 23

The underlying Bloomberg Barclays U.S. 10+ Year Corporate Bond Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility and financial companies with maturities greater than 10 years. It charges 5 bps in fees and yields 4.41% annually.

iShares Aaa - A Rated Corporate Bond ETF QLTA — Up 7.5% on Mar 23

The underlying Bloomberg Barclays U.S. Corporate Aaa - A Capped Index measures the performance of the Aaa-A rated range of the fixed-rate, U.S. dollar-denominated taxable, corporate bond market. It charges 15 bps in fees and yields 3.31% annually.

iShares IBoxx $ Investment Grade Corporate Bond ETF LQD — Up 7.39% on Mar 23

The underlying Markit iBoxx USD Liquid Investment Grade Index is a rules-based index consisting of liquid, U.S. dollar denominated, investment-grade corporate bonds for sale in the United States. This fund charges 15 bps in fees and yields 3.92% annually.

PIMCO Investment Grade Corporate Bond Index ETF CORP — Up 7.1% on Mar 23

The underlying ICE (NYSE:ICE) BofAML US Corporate Index is an unmanaged index comprising U.S. dollar denominated investment grade, fixed rate corporate debt securities publicly issued in the U.S. domestic market with at least one-year remaining term to final maturity and at least $250 million outstanding. It charges 20 bps in fees and yields 3.78% annually.

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