MBBB Is a Meaningful Idea for Corporate Bonds
MBBB is less a market call than a screening exercise. Its appeal is that the index does not treat all investment-grade corporate bonds alike; it narrows the universe to BBB-rated issuers that look relatively attractive on valuation while seeking to avoid names with a higher downgrade risk. For ETF investors, that kind of methodology matters because the label “investment grade” can still hide very different credit profiles.
The concentration issue is also worth watching. BBB exposure can become a deliberate tilt toward the lower end of the investment-grade spectrum, which may improve carry but also increases sensitivity to any deterioration in fundamentals. In other words, the fund’s construction may be more selective than a broad corporate bond benchmark, but it is still tied to the credit cycle and to spread behavior when markets become more defensive.
Duration is the other key portfolio variable. Intermediate-term exposure can help reduce some of the price volatility associated with longer-dated corporate debt, but it does not eliminate interest-rate risk. Investors thinking in portfolio terms should consider whether MBBB is meant to replace a broad core bond sleeve, complement it, or serve as a targeted credit allocation within a more diversified fixed-income mix.
That makes the ETF most useful as a decision tool rather than a headline trade. The central question is not whether corporate bonds are “good” or “bad,” but whether an investor wants a rules-based way to emphasize value inside investment-grade credit while accepting the trade-offs that come with lower-rated issuers, spread risk and rate exposure.
The widely observed Markit iBoxx USD Liquid Investment Grade Index is off 2.43% year-to-date, perhaps reflecting reduced expectations for first-quarter interest rate cuts by the Federal Reserve. Some lethargy by investment-grade corporate bonds to start 2024 doesn’t mean investors should write off the asset class, but it could imply that now is an appropriate time for fixed income investors to be picky in how they access corporate debt. The VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB) is up to the challenge.
MBBB is a prime example of methodology being critical in the ETF selection process. The fund’s underlying index is designed to identify investment-grade corporate bonds with the alluring combination of attractively valued bonds with reduced odds of being downgraded to junk status.
MBBB Matters Now
MBBB’s value profile is pertinent today because some fixed income market participants are skittish regarding valuations on investment-grade corporates.
“Investors’ focus on credit spreads rather than yield has started to suggest some nervousness given stretched valuations. But it’s abundantly clear that elevated rates contain volatility, and a supportive, fundamental backdrop is unlikely to cause spreads to move materially wider in the absence of any major external shock,” noted BNP Paribas.
Not only does MBBB deliver on the value front, its income stream is stout as highlighted by a 30-day SEC yield of 5.40%. That comes with an effective duration of 6.35 years, which is intermediate-term territory. That could imply MBBB has superior diversification properties relative to longer-dated corporate bonds.
There are noteworthy fundamental factors underpinning the MBB thesis. Importantly, many of the issuers in the BBB space are at low risk of default and could prove sturdy should the U.S. economy hit some unexpected bumps.
“Beyond that, we like BBB [rated]corporates, especially issuers in sectors which have shown discipline in reducing debt and increasing cash flow, but that are still quite cheap versus their higher-rated counterparts. These companies should outperform in a context where the economy slows down without the US entering a full-blown recession,” added BNP Paribas.
Plus, while some corporate bond ETFs are struggling in the early innings of 2024, data indicate professional investors have been stepping into the asset class.
“From a demand standpoint, the start of 2024 has been supportive, with strong inflows into the asset class. We expect demand to remain robust throughout the year in an environment where growth slows, [interest]rates fall, and cash becomes less attractive than credit. This should help to support credit spreads,” concluded BNP Paribas.
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