Investment-Grade Bond Funds: A Safe Bet?

Investment-grade bond funds are portfolios that focus on investment-grade bonds issued by corporations in US dollars. These bonds tend to carry more credit risk than government or agency-backed bonds. Investment-grade corporate bonds are issued by highly solvent companies with strong balance sheets. These bonds have historically demonstrated resilience in volatile markets and tend to have a low correlation with other asset classes, particularly risky assets. As of June 2024, global investment-grade corporate bonds offered yields above 5%, making them an attractive investment option.

Corporate bond funds concentrate on investment-grade bonds issued by corporations in US dollars

Investment-grade bond funds are portfolios that focus on investment-grade bonds issued by corporations in US dollars. These funds tend to carry more credit risk than government or agency-backed bonds.

Corporate bond funds that concentrate on investment-grade bonds issued by corporations in US dollars make up more than 65% of their assets in corporate debt. They also hold less than 40% of their assets in non-US debt and less than 35% in below-investment-grade debt. The durations of these funds typically range between 75% and 150% of the three-year average of the effective duration of the Morningstar Core Bond Index.

• IShares 5-10 Year invmt Grd Corp Bd ETF
• IShares Broad USD Invm Grd Corp Bd ETF
• SPDR® Portfolio Interm Term Corp Bd ETF
• SPDR® Portfolio Corporate Bond ETF
• IShares ESG USD Corporate Bond ETF
• IShares iBoxx $ Invmt Grade Corp Bd ETF
• Schwab 5-10 Year Corp Bd ETF
• Goldman Sachs Acss Invmt Grd Corp Bd ETF
• Vanguard Interm-Term Corp Bd ETF
• PIMCO Investment Grade Corporate Bd ETF

Investment-grade corporate bonds are issued by highly solvent companies with strong balance sheets

Investment-grade corporate bonds are issued by companies with strong financial health and a low risk of default. The "investment-grade" label indicates that these bonds are considered relatively safe investments due to the stability and creditworthiness of the issuing companies.

These bonds typically have maturities ranging from one to ten years, and their yields can be attractive to investors, currently sitting at above 5% on a global index level. The funds that invest in these bonds aim to provide consistent returns and income for investors while preserving capital.

By investing in investment-grade corporate bonds, investors can benefit from the strong financial position of the issuing companies, which often have conservative balance sheets and low default risks. This makes these bonds a relatively secure investment option, particularly when compared to riskier assets.

Additionally, investment-grade corporate bonds can help diversify an investor's portfolio. They generally have a low correlation with other asset classes, especially risky assets, which can help reduce overall portfolio risk.

Investment-grade bonds have more credit risk than government or agency-backed bonds

Investment-grade bonds are issued by corporations in US dollars and carry more credit risk than government or agency-backed bonds. Credit risk refers to the likelihood of a bond issuer defaulting on their debt. The higher the credit risk, the less likely investors will get their money back.

Credit rating agencies like Standard & Poor's, Moody's, and Fitch use letter-based credit scoring schemes to indicate the credit quality of a bond. Bonds with a higher rating are considered safer and more stable investments. Investment-grade bonds are rated "AAA" to "BBB-" by Standard & Poor's and Fitch, and "Aaa" to "Baa3" by Moody's.

Government bonds, also known as Treasuries, are generally given the highest possible credit rating. This means that they are considered to have a very low risk of default.

While investment-grade bonds have a relatively low risk of default compared to non-investment grade or "junk" bonds, they still carry more credit risk than government or agency-backed bonds. This is because corporations that issue bonds may be more vulnerable to adverse economic conditions or changes in their business environment, which can affect their ability to meet their financial commitments.

It's important to note that credit ratings are not static and can change over time. A downgrade in a bond's credit rating can impact its classification and the cost of borrowing for the issuer.

Corporate bond portfolios hold over 65% of their assets in corporate debt

Investment-grade bond funds are a type of bond fund that focuses on investment-grade bonds, which are considered to be of higher quality and have a lower risk of default. These funds primarily invest in bonds issued by corporations and tend to have a higher credit risk than government or agency-backed bonds.

Corporate bond portfolios, a type of investment-grade bond fund, hold a significant proportion of their assets in corporate debt. Specifically, they hold over 65% of their assets in corporate debt, less than 40% in non-U.S. debt, and less than 35% in below-investment-grade debt. This composition reflects the focus of corporate bond portfolios on investment-grade bonds issued by corporations.

By holding a substantial amount of their assets in corporate debt, these portfolios offer investors exposure to the performance of corporate bonds. The investment-grade status of these bonds indicates a relatively lower risk of default, making them attractive to investors seeking stable and conservative investment options.

It is important to note that corporate bond portfolios have varying investment strategies and criteria. For example, some portfolios may prioritize bonds with longer durations, while others may focus on shorter-term opportunities. Additionally, the specific holdings and weightings of corporate debt can vary across different portfolios, depending on the fund manager's strategy and market conditions.

The performance of corporate bond portfolios is influenced by various factors, including the financial health and creditworthiness of the issuing corporations. Investors should carefully consider the risks associated with corporate debt, such as credit risk and interest rate risk, before investing in these portfolios.

Investment-grade bonds have lower correlation with other asset classes

Investment-grade bonds have a lower correlation with other asset classes. This means that they do not tend to move in tandem with other investments.

In portfolio construction, understanding how each investment or asset class interacts with one another is crucial to achieving specified financial goals. Correlation measures the strength of the historical relationship between two investments or asset classes. A correlation of 1.0 indicates that the two asset classes have moved in sync with each other. A correlation of -1.0 means the two asset classes moved in opposite directions. As the correlation approaches 0.0, the movement between the two asset classes becomes random or uncorrelated.

Fixed-income investments, such as bonds, are often a cornerstone of investment portfolios due to their income generation and perceived stability. In theory, fixed income should act as an uncorrelated diversifier to equities, offering stability when the stock market becomes volatile. However, in practice, this is not always the case, as some investors seek higher yields by investing in segments of the fixed-income market that are highly correlated with equities.

High-quality investment-grade bonds, such as Treasurys and corporate bonds rated A or better, generally exhibit a low correlation with equities. On the other hand, bonds with greater credit risk tend to have a higher correlation with equities, meaning they move in sync with the stock market.

Understanding the correlation between investment-grade bonds and other asset classes is essential for investors and advisors when constructing a portfolio. By including investments with lower correlations, investors can reduce the risk of their portfolio and increase the likelihood of positive returns.

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