An ETF For Expanding Corporate Bond Horizons

Investors hunting for yield have made U.S. corporate bonds, both investment-grade and junk fare, popular destinations. That much is evident by the more than $23.5 billion in assets sitting in the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE:LQD), the bellwether corporate bond ETF.

The iShares iBoxx $ Investment Grade Corporate Bond Fund is a lot of things. Home to even modest international exposure is not one of those things. It stands to reason that if investors are groomed to at least consider international stocks, that they should do the same with corporate bonds.

"By expanding the investable universe to corporations outside the United States, the size of the opportunity set more than doubles (2.54x)," said WisdomTree Portfolio Manager Rick Harper in a new research note. "In fact, there have been a growing number of institutional investors pursuing wider corporate credit mandates, a strategy referred to as expanding the core.'

Importantly, taking a more global approach to corporate bonds does not mean significantly increased credit risk. Part of the allure with LQD is that nearly 28 percent of the ETF's holdings are rated A- by Standard & Poor's, according to iShares data. Another 25 percent are rated A or A+.

The newly minted and actively managed WisdomTree Global Corporate Bond Fund (NASDAQ:GLCB) is home to its own sturdy credit profile. Over 51 percent of GLCB's holdings are rated A or AA, according to issuer data.

Yes, GLCB is heavily allocated to the U.S. (almost 52 percent), but it is not a pure play U.S. corporate bond ETF. Overall, GLCB holds bonds from corporate issuers in 15 countries. Four of those countries Russia, Mexico, Brazil and Colombia are emerging markets.

Six of GLCB's country components are eurozone members. Those are Italy, France, Spain, Germany, Netherlands and Belgium. Although the new ETF's credit profile indicates that investors are taking on substantially higher risk with global corporates, the fund does superior yield compensation.

"In addition to expanding the number of opportunities, investors have also been compensated with higher yields across virtually all credit ratings by investing in global credit risk as opposed to a purely U.S. approach," said Harper.

GLCB's average yield to maturity is 3.72 percent, or 87 basis points higher than LQD's. Investors concerned about rising interest rates will also want to have a look at GLCB. The new ETF has an effective duration of 5.54 years compared to 7.94 years on LQD.

GLCB's largest country weights after the U.S. are the U.K. (9.56 percent), Russia (4.51 percent), Italy (4.42 percent) and Mexico (3.6 percent). The ETF, which charges 0.45 percent per year, debuted in late January and now has over $7.6 million in assets.

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