Corporate Bond ETF Ideas For A Rising Rate Environment

There is a simple reason why five of the 10 worst exchange-traded funds in terms of fourth-quarter outflows are fixed income funds. However, before explaining further, it should be noted that the iShares Barclays Aggregate Bond Fund (NYSE:AGG) is this quarter's top asset gatherer.

The fixed income funds' prevalence can be attributed to investors expecting this will be the month when the Federal Reserve raises interest rates for the first time in nine years.

There is also increasing chatter that the U.S. central bank will move forward with as many as four rate hikes next year, bringing the benchmark rate to 1.25 percent by the end 2016. Investors' current treatment of bond ETFs is a stark departure from October, when four of the top five asset-gathering ETFs and five of the top 10 overall to start the fourth quarter were bond funds.

Related Link: Going High Class With A Junk Bond ETF

Fed's Influence On Sentiment

Predictably, the Federal Reserve loomed large in the ETF decisions made by advisors and investors last month. With many market participants expecting the U.S. central bank will, later this month, boost borrowing costs for the first time in nine years, U.S. stock ETFs received more cash on expectations the looming rate hike signals Fed confidence in the strength of the world's largest economy.

Conversely, investors yanked $4.5 billion from fixed income funds in November, according to BlackRock data.

Gathering Assets

Some shorter term fixed incomes are gathering assets. Ideas from that group include the $10.8 billion iShares Barclays 1-3 Year Credit Bond Fd (NYSE:CSJ).

CSJ has duration of 1.9 years and offers a 1.3 percent 30-day SEC yield, by investing in primarily investment-grade corporate bonds, with more modest exposure to agency and government bonds. Two-thirds of the assets in bonds rated A or BBB from ratings agencies that operate independently from S&P Capital IQ, said S&P Capital IQ in a note out Monday.


CSJ is down just 0.3 percent this year, significantly less bad than the 3.3 percent shed by the iShares iBoxx $ Invest Grade Corp Bd Fd (NYSE:LQD). LQD, the largest corporate bond ETF, has an effective duration of just over eight years.

Investors looking for a shorter term play on high yield corporate bonds can consider the $3.1 billion SPDR Barclays Short Term High Yield Bond ETF (SPDR Series Trust (NYSE:SJNK)).


SJNK's duration is just 2.4 years, according to State Street data, but the ETF has other compelling attributes that make it worthy of consideration, even in a trying environment for junk bonds.

Those include energy sector exposure lower than rival junk funds, a potential selling point at a time of elevated junk defaults by energy issuers.

Related Link: A New Spin On Corporate Bond ETFs

Standard & Poor's Ratings Services expects that the U.S. corporate speculative-grade default rate to rise to 3.3 percent by September 2016, up from 2.5 percent a year earlier. Areas of stress cited by the ratings agency include the impact of persistently low oil prices, the impact of interest rate hikes by the Federal Reserve and slower global growth. Yet by most measures, increased defaults in the near future should still be muted by historical standards, noted S&P Capital IQ.

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