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ETF Talk: Corporate Bonds Outshine U.S. Treasuries

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02/01/2012

The U.S. economy effectively can be viewed in two parts: the consumer sector and the corporate sector. While the consumer economy is hamstrung by excess debt and a mortgage mess that will take time to heal, the corporate sector appears fairly strong. Indeed, the corporate sector has recovered from the 2008 recession considerably faster than the consumer sector. Corporate balance sheets in the United States, in particular, generally are healthy, and that means corporate investment grade debt is worth considering as a new addition to your portfolio.
 
One easy way to invest in corporate bond funds is through the iShares iBoxx Investment Grade Bond ETF (LQD). The exchange-traded fund (ETF) offers an investment vehicle to add income to your portfolio this year. The iShares iBoxx $ Investment Grade Corporate Bond Fund specifically seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the corporate bond market, as defined by the iBoxx $ Liquid Investment Grade Index
 
LQD consists of more than 600 different bond issues and over $17 billion in assets. The one-year performance of LQD remains strong at 7.6%, with a 30-Day SEC yield of 3.69% and 12-month yield of 4.33%. As a result, LQD provides a much stronger yield than what you will find in the U.S. Treasury market.
 
 
In what basically has become a negative real interest rate environment, it is important to protect our savings, while still producing income. With a willingness to absorb a little risk, you can invest in the corporate bond market to boost your income beyond what U.S. Treasuries currently offer. By holding higher-yielding, investment-grade bonds in your portfolio, you can mitigate the Fed’s policy of keeping interest rates at ultra-low levels.
 
Granted, we have to think about capital preservation in a “risk-on, risk-off” trading environment. This reality means that you can increase your risk prudently by using some higher-yielding debt. The extent that you use this strategy should be determined by your individual investment needs and risk tolerance. Capital preservation will continue to remain a major theme in the investment community going forward. So, at least for 2012, corporate grade debt may be worth checking out to help you shield your portfolio from negative real interest rates.
 
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

 

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