AGG iShares Core US Aggregate Bond

Markets have been quite sluggish in April, as a lukewarm earnings season has taken its toll on stocks across the board. Broad benchmarks like the S&P 500 have retreated from their all-time highs thanks to this lackluster earnings season, with energy, materials, and tech leading on the downside.

This trend has pushed many investors into safer sectors like utilities or health care for equities, and back into bonds once more as well. In particular, we have seen a broad move back into corporate securities, as these offer a nice mix between yield and safety which could be ideal in this environment (read Buy These Bond ETFs for Income and Diversification).

That is because many corporate bonds have moderate durations, and yields that far exceed T-bill payouts. And with minimal defaults and little prospect for an interest rate increase in the near term, these lower volatility securities could be an interesting way to wait out equity market volatility.

While there are a number of picks in this space, the iShares Investment Grade Corporate Bond ETF (LQD) could be an especially intriguing option. This fund is a low cost (15 basis points) choice that has a great deal of volume and AUM, which suggest that bid-ask spreads could be minimal, making it a prime selection for shorter-term traders.

LQD in Focus

The ETF also holds a wide variety of securities in its portfolio, with more than 1,000 names finding their way into the fund. And with this many companies in the fund, firms don’t have the ability to dominate the holdings profile as the top ten accounts for less than 4.25% of the total (see Three Great Bond ETFs Investors Have Overlooked).

In terms of maturity, the average is 12.17 years, putting it in the middle of the curve. Still, results are skewed thanks to a 17.9% holding in ultra-long term bonds, and then 44% in 5-10 maturities, and 23.5% in 1-5 year maturities.

For credit quality, more than half the portfolio falls into the A+ to A- range, though there is about 25% in the ‘BBB’ range, and a bit more in the ‘AA-‘ or above segment. This results in a portfolio that has a 30 Day SEC Yield of about 2.8%, although the 12 month yield is a bit higher at 3.7%.

LQD Performance

This higher yield and lower volatility inherent in investment grade bonds, has led to some outperformance as of late for the iShares product. The fund has easily beaten out its bond counterparts of AGG and BND, while it has also outperformed SPY in the trailing one month time frame.

This is all despite some big outflows from this product and into other bond funds in the space. In fact, LQD has lost about half a billion in assets so far this quarter, and it actually leading all bond products in outflows for the year-to-date period (See Key Criteria to Know Before Buying an ETF).

We think this is a big mistake for many bond investors, as this product is extremely liquid, and it has proven to be a solid mix from a performance perspective in the recent turbulent time frame as well.

LQD in the weeks ahead

A trend of gains could continue in the weeks ahead as well, since the fund recently saw its short-term moving averages blow past its longer term one. This move suggests more short term bullishness ahead, especially considering how far the shorter term averages have moved above the longer term ones in recent trading periods.

Bullish trends could also be established in the bond space if equities fail to establish their footing this earnings season. This trend could push more back into bonds, and especially medium duration higher quality securities.

Admittedly though, this would represent a bit of a reversal from the current trend line, as many investors are obsessed with low duration securities like BSV, BKLN, or SHV for their exposure. Yet if equities continue to slump and the Fed looks to stay on hold, this could push investors back in LQD for their fixed income ETF exposure (read Zacks Top Ranked Corporate Bond ETF: LQD).

Bottom Line

Even though many investors have pulled out their money from mid-range corporate bonds, we still like the investment case for this segment in the near term. That is why we have a Zacks ETF Rank of 2 or ‘Buy’ on the fund, which means we believe this fund will outperform other products over the next several months.

This could be especially true if current conditions hold in the equity market and investors look for safer options in the fixed income world. Shorter-duration securities may not cut it if it looks like the Fed isn’t going to hike rates, meaning that funds like LQD could be in focus once more when earnings season concludes.

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ISHARS-BR AG BD (AGG): ETF Research Reports
 
PWRSH-SNR LN PR (BKLN): ETF Research Reports
 
VANGD-TOT BOND (BND): ETF Research Reports
 
VANGD-SHT TRM B (BSV): ETF Research Reports
 
ISHARES GS CPBD (LQD): ETF Research Reports
 
ISHARS-BR SH TB (SHV): ETF Research Reports
 
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