The universe of Investment Grade bond ETFs have been lifted by the Fed’s recent announcement of their corporate bond buying program. As the traffic in these ETFs is sure to increase once the buying begins, use Overbond’s Index NAV pricing to better grasp intraday moves of these baskets.
As promised, the Fed started buying $750 billion in corporate bonds for the first time in history. Notably, failing to contain the coronavirus-led acute market rout by its crisis-era policy launch, the Federal Reserve announced buying of corporate bonds on Mar 23.
However, the Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds. Later in April, the Fed said it would expand its bond-buying program to include debt that was investment-grade rated as of Mar 22 but was later downgraded to no lower than BB-, or three levels into high yield
The Fed has now indicated that maximum purchases being made now will be in funds that hold investment-grade debt, though it will dip its toe into junk bonds later. The program is managed by BlackRock, “will take $75 billion in equity from the Treasury and leverage it 10-to-1, giving it up to $750 billion to play with,” per The New York Times.
The very promise by the central bank shored up the corporate bond market in the past month. In fact, some companies are now issuing cheaper long-term debt to repay revolving credit. The zero-interest rate policy by the Fed is also helping the move.
Boeing’s (BA) $25-billion bond issue demonstrates the huge demand in the corporate bond market. It is known to all that Boeing shares have been suffering for long due to the 737 Max crisis. Still, its brilliant success in accessing the bond market indicates the importance of the Fed move.
Apart from Boeing, Procter & Gamble executed a $5 billion deal, while Visa raised $4 billion, PayPal issued $4 billion in bonds, Altria raised $2 billion and Mondelez issued $1.5 billion.
Against this backdrop, below we highlight a few investment-grade corporate bond ETFs that have been on a tear lately and are likely to jump even more in the near term on the start of Fed buying.
Vanguard Long-Term Corporate Bond ETF VCLT
The underlying Bloomberg Barclays U.S. 10+ Year Corporate Bond Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility and financial companies with maturities greater than 10 years. It charges 5 bps in fees and yields 3.62% annually.
iShares Aaa – A Rated Corporate Bond ETF QLTA
The underlying Bloomberg Barclays U.S. Corporate Aaa – A Capped Index measures the performance of the Aaa-A rated range of the fixed-rate, U.S. dollar-denominated taxable, corporate bond market. It charges 15 bps in fees and yields 2.86% annually.
iShares IBoxx $ Investment Grade Corporate Bond ETF LQD
The underlying Markit iBoxx USD Liquid Investment Grade Index is rules-based and consists of liquid, U.S. dollar denominated, investment-grade corporate bonds for sale in the United States. This fund charges 15 bps in fees and yields 3.27% annually.
PIMCO Investment Grade Corporate Bond Index ETF (CORP)
The underlying ICE BofAML US Corporate Index is an unmanaged index comprising U.S. dollar denominated investment grade, fixed rate corporate debt securities publicly issued in the domestic market with at least one-year remaining term to final maturity and at least $250 million outstanding. It charges 20 bps in fees and yields 3.24% annually.