iShares – the biggest ETF sponsor in the world – is continually striving to boost its presence in the fixed income space. The issuer has of late launched a series of bond funds to widen its product portfolio in this important segment.
Last year, the issuer rolled out four target-date maturity corporate bond funds such as iShares 2016 Corporate ex-Financials Term ETF (IBCB) and iShares 2018 Corporate ex-Financials Term ETF (IBCC) to give investors new options for fixed income exposure.
Continuing the trend, the firm has put two more target-date maturity bonds out this year, not ignoring the financial sector this time around. The recently launched funds – iShares Bond Dec 2016 Corporate Term ETF and iSharesBond Dec 2018 Corporate Term ETF – hit the market on May 28, 2014 and trade under the symbols of IBDF and IBDH respectively.
IBDF in Focus
The newly launched fund seeks to track the Barclays December 2016 Maturity Corporate Index, giving investors exposure to U.S. dollar-denominated, taxable, investment-grade corporate bonds maturing in 2016.
The fund has an effective duration of 1.95 years focusing on the short-end of the yield curve. Also, the fund has a very low interest rate risk as measured by an effective duration of 1.95 years.
The fund managed to garner roughly $10 million during launch and is quite cheap with an expense fee of just 10 basis points.
With this approach, IBDF is likely to face competition from Guggenheim’s BulletShares 2016 Corporate Bond ETF (NYSE:BSCG), which has lately seen a huge surge in popularity and has amassed $623 million since its inception in 2010. However, investors should note that BSCG is relatively costlier than the newly launched fund charging investors 24 basis points as fees.
Holding 293 securities in its basket, the fund has an average effective duration of 2.11 years and an average maturity of 2.25 years.
Apart from the defined-maturity ETFs, there are a couple of choices in the investment grade corporate bond ETF space targeting short-term maturities.
The most popular in the short-term space is the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH), which charges a slightly higher fee of 0.12% from investors. The average maturity is 3.10 years and effective duration is 2.90 years. The fund manages an impressive AUM of over $8 billion.
IBDH in Focus
IBDH tracks the Barclays December 2018 Maturity Corporate Index, holding investment-grade corporate bonds scheduled to mature in 2018.
The fund has a weighted average maturity of 3.91 years, with an effective duration of 3.62 years, suggesting a slightly higher interest rate risk as compared to its recently launched cousin. However, IBDH has the same asset base and expense ratio as IBDF.
The fund looks to follow the footsteps of Guggenheim BulletShares 2018 Corporate Bond ETF (NYSE:BSCI), which also focuses on investment grade bonds with maturities around 2018. Having an average maturity of 4.17 years and average effective duration of 3.70 years, the fund manages an asset base of over $345 million. The fund charges 24 basis points as fees.
The other popular fund that IBDH might face competition from is the iShares Intermediate Credit Bond ETF (NYSE:CIU) that looks to provide exposure to U.S. dollar-denominated, investment-grade corporate, sovereign, supranational, local authority and non-U.S. agency bonds.
The fund has a weighted average maturity of 4.82 years and an effective duration of 4.27 years.
How do these fit in a portfolio?
The newly launched funds primarily seek to maximize current income in the form of interest at a time when investment in the fixed income space can be considered quite unattractive, given the extremely low interest rates and high bond prices.
Moreover, with the U.S. economy picking up momentum in the current quarter and the Fed steadily reducing its bond buying program, interest rates are expected to climb up sooner or later.
Under such circumstances, short-term bonds are expected to be safer bets as compared to intermediate and longer-term bonds. This is especially true given that short-term bonds have less interest rate sensitivity than others. Moreover, as far as credit quality is concerned, high quality bonds are usually a safer bet in times of economic uncertainties and market volatilities.
They also provide a big increase in yields as compared to treasuries, though at a slightly higher risk level. Further, these bonds create laddering possibilities for investors seeking to retain targeted exposure to the bond market.
Given these benefits, the newly launched funds might be able to garner investor interest in the face of continued fed tapering, though it may be an uphill battle.