VCSH Vanguard Short Term Corporate Bond

Though iShares dominates the equity ETF market, it is still lagging in the fixed income space. However, the issuer has made great strides in recent months to expand its lineup in the bond world.

This expansion in the fixed income space continues this year as the issuer rolls out four target-date maturity corporate bond funds that aim at giving investors new options for fixed income exposure (read: iShares Launches 2018 Muni Bond ETF).

These ETFs look to focus on corporate bonds with maturities in 2016, 2018, 2020 and 2023 while charging 10 bps in fees a year. Each fund will be comprised of U.S.-dollar denominated, investment-grade corporate debt from both U.S. and non U.S. issuers with at least $250 million in outstanding face value.

These products would face severe competition from the roster of Guggenheim’s BulletShares ETFs, which cost investors 24 bps in fees and expenses, and also from some other popular corporate bonds ETFs. Hence, the pursuit of success could turn out to be difficult.

Nevertheless, for those investors seeking new plays on target-date corporate bonds, we have highlighted the new iShares launches below (see more in the Zacks ETF Center):

iShares 2016 Investment Grade Corporate Bond ETF (IBCB)

This ETF looks to track the Barclays 2016 Maturity High Quality Corporate Index and will be traded as the iShares Bond 2016 Corporate ex-Financials Term ETF. This index’s bonds have an effective duration of 2.5 years while the yield to maturity is less than 0.9%.

In total, the fund holds about 70 bonds in its basket, with single issuers comprising no more than 2.5% each. Credit quality is skewed towards the low ‘A’ range, although there are a few assets in the ‘AAA’ and ‘BBB’ levels as well.

The fund looks to follow an approach similar to that of Guggenheim’s BulletShares 2016 Corporate Bond ETF (BSCG), which has amassed $203.8 million in its asset base. With holdings of 23 securities, BSCG has an average maturity of 3.40 years and an effective duration of 3.16 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 (read: Are Short Term Bond ETFs the New Safe Haven?).

The most popular is the Vanguard Short-Term Corporate Bond ETF (VCSH), which charges a slightly higher fee of 0.12% from investors. The average maturity is 3.10 years and defective duration is 2.90 years. The fund has an impressive AUM of over $5.7 billion.

iShares 2018 Investment Grade Corporate Bond ETF (IBCC)

This ETF looks to track the Barclays 2018 Maturity High Quality Corporate Index and is doing business as the iShares Bond 2018 Corporate ex-Financials Term ETF. This benchmark has an average yield to maturity of 1.44% and an effective duration of roughly 4.2 years.

The fund holds 80 bonds in its basket, while allocating assets in a similar fashion to IBCB. ‘A’ and ‘A-‘ rated bonds make up nearly 45% of assets, while ‘A+’ and ‘AA’ securities account for another 25% of the total.

Its direct competitor, the Guggenheim BulletShares 2018 Corporate Bond ETF (BSCI) focuses on investment-grade corporate bonds that will mature around 2018. With AUM of $70 million, the product has an effective maturity of 5.30 years and effective duration of 4.55 years.

The other popular corporate bond ETF that might compete with IBCC is iShares Barclays Intermediate Credit Bond Fund (CIU). The fund zeros in on U.S. investment grade bonds having an average maturity of 4.92 years and effective duration of 4.34 years. It is also a popular ETF with AUM of $5.4 billion while charging 20 bps in annual fees.

iShares 2020 Investment Grade Corporate Bond ETF (IBCD)

This ETF looks to track the Barclays 2020 Maturity High Quality Corporate Index and is doing business as the iShares Bond 2020 Corporate ex-Financials Term ETF. The index sees an effective duration of just over 5.5 years while the yield to maturity comes in at roughly 2.2%.

Bonds in this ETF also are well spread out with no one security accounting for more than 2.4% of assets. Credit quality is also focused on the ‘A’ range, as A+ to A- makes up roughly 70% of the total.

In comparison, BulletShares 2020 Corporate Bond ETF (BSCK) has managed assets worth $28.9 million with an effective maturity of 7.46 years and a weighted average coupon of 5%.

The other popular ETF – Vanguard Intermediate-Term Corporate Bond ETF (VCIT) – targets the intermediate part of the yield curve with a weighted average maturity of 7.50 years. The fund is subject to moderate levels of interest rate risk as indicated by a weighted average duration of 6.50 years. The ETF charges 12 bps in annual fees and has accumulated about $3.2 billion in its asset base.

iShares 2023 Investment Grade Corporate Bond ETF (IBCE)

This ETF looks to track the Barclays 2023 Maturity High Quality Corporate Index and is doing business as the iShares Bond 2023 Corporate ex-Financials Term ETF. The underlying benchmark has an effective duration of just under 8.2 years, along with a yield to maturity of roughly 2.85%.

Its portfolio is also spread out, although it looks to have a slightly wider dispersion thanks to its holding of nearly 90 different bonds. Credit quality is also focused in on the lower A range, though this ETF is especially concentrated in ‘A’ and ‘A-‘ as these two account for nearly 55% of the portfolio.

For competitors, the list is quite impressive as there is a wide range of funds focusing on the long end of the curve. The most popular in the space is iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) with an asset base of $23.5 billion.

Holding 1,079 securities, the fund has an average maturity of 12.16 years and average duration of 7.94 years. The fund is also a potential competitor on the cost front, as it charges investors 15 basis points in fees and expenses (read: Zacks Top Ranked Corporate Bond ETF: LQD).

How do these fit in a portfolio?

These products are interesting choices for investors who wish to avoid stock market volatility while at the same time ensure a steady stream of cash flow from their portfolio. These will also create laddering possibilities for investors seeking to retain targeted exposure to the bond market.

These products can also be great picks for investors seeking to match assets with liabilities, in order to have capital ready for a big purchase a few years from now (read: Target Date Bond ETFs: Best or Worst Fixed Income Funds?).

While the funds are generally cheaper than their ‘regular’ bond counterparts in terms of expense ratios, due to their lower portfolio rebalancing and turnover they can incur wide bid-ask spreads thanks to the low volumes triggered by inactive trading. This can thereby increase the total cost of investing, although this depends on securities bought and the size of the fund in question.

Moreover, high quality corporate bonds provide a big increase in yields when compared to Treasury bonds, with only a slight increase in risk. Due to solid balance sheets and high cash levels of the investment grade corporates, the chances of default are minimal.

Thus the investment-grade corporate bonds can be considered pretty safe as far as credit risk is considered. Further, if the global economic situation worsens causing further “flight to quality”, the investment grade bonds will suffer less (read: Time to Exit Junk Bonds ETFs?).

Given this, it seems that the new iShares targeted corporate bond ETF will perform favorably in terms of investor interest. And if it can manage to generate a decent yield and stable returns, it won’t be too hard to see big inflows for this solid addition to the iShares’ bond lineup.

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GUGG-BS2016 CB (BSCG): ETF Research Reports
 
GUGG-BS2018 CB (BSCI): ETF Research Reports
 
GUGG-BS2020 CB (BSCK): ETF Research Reports
 
ISHARS-BR IM CB (CIU): ETF Research Reports
 
ISHARES GS CPBD (LQD): ETF Research Reports
 
VANGD-IT CRP BD (VCIT): ETF Research Reports
 
VANGD-ST CRP BD (VCSH): ETF Research Reports
 
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