Amid aggressive interest rate tightening by the Federal Reserve, investors are obviously chastened by bonds and fixed income exchange traded funds, but through the carnage, opportunities are emerging.
Those include investment-grade bonds accessible via several ETFs, including the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG). MIG tracks the MVIS® Moody’s Analytics® U.S. Investment Grade Corporate Bond Index and could be a compelling option for income investors today due to multiple factors.
Perhaps surprising to some investors, corporate bonds, including investment-grade fare, offer higher levels of income with less risk than high-dividend stocks.
“These investment-grade bonds historically come with much less risk than their equity counterparts. Investors can earn more income and preserve capital with less risk and maintain exposure to many of the same companies via their bonds instead of their stocks,” according to BlackRock research.
On that note, MIG is particularly relevant today because the ETF’s underlying index is designed to identify corporate bonds offering value with a lower probability of being downgraded. That type of precision is relatively new in the fixed income ETF arena but nonetheless advantageous for selective investors.
“The first bond ETFs largely delivered broad, index tracking exposure to entire markets or asset classes. Newer bond ETFs break down asset classes into more precise exposures. This increasing granularity is enabling investors more sophisticated strategies unlocking novel access to diversified sources of yield,” according to BlackRock.
For its part, MIG holds 213 bonds. That’s far fewer than what’s found in plain vanilla corporate bond ETFs, but that roster size is more a testament to selectivity than it is a criticism. According to issuer data, the average maturity of MIG holdings is 10.08 years.
In terms of quality, MIG is as sturdy as advertised. More than 60% of the ETF’s holdings are rated BBB, while nearly 28% are rated AA or A. That quality and diminished risk of holdings-level downgrades doesn’t mean investors are sacrificing income. MIG sports a 30-day SEC yield of 5.73%, which exceeds what investors earn with aggregate bond ETFs and broader equity strategies. Plus, MIG charges just 0.20% per year or $20 on a $10,000 stake.
“The convenience, diversification, and lower-cost of bond ETFs make them prime candidates for persistent growth even in the fact of mounting inflation and rising rates as investors around the world look for better ways to access fixed income returns,” concludes BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.