Fixed Income: U.S. - Corporate Investment Grade Intermediate
Investment-grade intermediate-term corporate ETF space can be split into two groups: those that try to capture the broad market; and target-date ETFs that aim for bullet maturities. The
“ITR earns our Analyst Pick ribbon here” broad ETFs include ITR, which covers the 1-10 year market; CIU, which broadens its scope to include USD-denominated foreign issues; VCIT, which only holds bonds expiring in 5-10 years; and the fundamentally selected and weighted PFIG. VCIT and ITR charge 12 bps each, and trade with tight spreads. The most liquid fund is CIU, largest volume and tightest spreads in the segment. PFIG has the widest market among the broad-market funds, so investors buying into its fundamental methodology would do well to avoid market orders.
The target-date funds only hold bonds with effective maturities in a specific time window. This group can also be further split into three subgroups: Guggenheim’s BulletShares suite, which achieves its stated maturities using a mix of both callable and option-free bonds; iShares’ iBonds suite which achieves its target maturities with only bonds mature in that time window; and iShares’ ex-financial iBonds suite, which exclude debt issued by financial firms and have a target rating of A/A2. All three product lines will behave more like a single bond than a basket of bonds, making them great choices for investors with liquidity events in those years. The iShares funds charge 10 bps a year, while the BulletShares charge 24 bps. None of these funds is particularly liquid—especially the new funds from BlackRock—but investors intending to hold them to maturity can effectively cut their trading spreads in half.
ITR earns our Analyst Pick ribbon here thanks to its broad portfolio that covers the entire 1- to 10-year maturity bucket for a reasonable 12 bp annual fee. VCIT makes its way on to our Opportunities List due to the fact that it only targets the 5-10 year pocket of the corporate bond market, albeit at a very reasonable cost. (Insight updated 09/22/17)
All Funds (25)
ITR $2.2 B 2198039825.3437 Best Fit
BSCL $756.01 M 756006300 Matures in 2021
IBDL $395.87 M 395868790 Matures in Dec 2020
BSCK $1.03 B 1031902650 Matures in 2020
IBDM $430.19 M 430194300 N/A
CIU $7.27 B 7273963320 broad credit beyond corporate
PFIG $47.35 M 47354450 Based on issuer fundamentals
IBDD $87.92 M 87924540 Matures in 2023
IBDN $325.22 M 325221120 N/A
VCIT $17.16 B 17164582522.3 Cheapest portfolio
IBDP $150.42 M 150423000 N/A
BSCM $600.94 M 600942000 Matures in 2022
BSCN $229.73 M 229731000 N/A
BSCO $188.14 M 188136000 N/A
IBDC $91.75 M 91747600 Matures in 2020
IBCD $92.38 M 92376000 Ex-financials, 2020 maturity target
SKOR $45.81 M 45810140.9001 N/A
IBDO $199.03 M 199031810 N/A
IBCE $47.73 M 47726640 Ex-financials, 2023 maturity target
IBDQ $223.94 M 223936160 N/A
BSCP $80.72 M 80718300 N/A
IBDR $58.71 M 58709760 N/A
IBD $20.05 M 20048000 N/A
IBDS $9.92 M 9918920 N/A
BSCQ $35.43 M 35434800 N/A
ETF.com Grade as 09/14/17
Fixed Income: U.S. - Corporate Investment Grade Intermediate
ETF.com Efficiency Insight
CIU and ITR are the most efficient broad-market funds in this segment, with reasonable 20 and 12 bp expense ratios, respectively. They offer consistent tracking that adds just a few basis
“CIU and UTR are the most efficient funds in this segment” points to their headline expense ratios. VCIT also charges just 12 bps—but it doesn’t track nearly as well, making its holding cost much harder to predict.
The other funds with reasonable track records charge higher fees and have tended to lag their underlying indexes by greater amounts: PFIG charges 22 bps, while the BulletShares fund suite charges 24 bps.
Most of the largest funds in this segment are extremely stable and well-established. CIU, at the top, has about $6B in AUM, and VCIT has a healthy $4B asset base. Excluding recent launches, the remaining funds have plenty of assets to make them viable in the long term. The iBonds fund suite is accumulating assets slowly but steadily. Taxable investors should also be aware that VCIT, ITR and CIU have all made recent capital gains distributions.
iShares’ iBonds suite will need more seasoning before we can evaluate their tracking prowess, but their 10 bp expense ratios put them on sound Efficiency footing. In fact, they are now the cheapest funds in the segment. (Insight updated 09/22/17)
ETF.com Tradability Insight
The most liquid fund in this segment is CIU, closely followed by VCIT. Both funds trade $30M+ most days, at narrow spreads. The biggest difference between the two is at the institutional
“The most liquid funds in this segment are CIU and VCIT.” level—large traders are likely to get a better deal on large blocks of CIU than VCIT—but both should be relatively easy to trade at any size.
Many of the established funds are still tradable, especially in retail quantities. ITR trades at least $2M most days, at manageable spreads.
While the BulletShares suite is not designed for active trading but funds in the suite trade comfortably more than $500K a day at wide but manageable spreads. iShares’ iBonds suite struggles with secondary liquidity–low median daily volumes and wide spreads–as its market has yet to mature. However, the silver lining for all target date funds is that buy-and-hold investors pay spreads only one way, effectively cutting trading costs into half.
PFIG–a tilted exposure to the broad corporate market–doesn’t trade well. As such, investors need to use great care when trading the fund.
Caution: Intermediate-term investment grade corporate bond market is not particularly liquid. So be sure to enlist the help of market makers when transacting large orders. (Insight updated 09/22/17)
ETF.com Fit Insight
Even though the investment-grade intermediate-term corporate bond segment is home to 19 ETFs, but only five ETFs—ITR, CIU, PFIG, VCIT, and SKOR—try to capture the broad market.
“The 19 ETFs hold very different portfolios, by design. ” The rest of the segment is populated with target date funds.
ITR comes the closest in mimicking the market with just over 1,300 holdings. CIU allocates more than 15% of its portfolio to supranational, foreign agency and foreign government debt, areas excluded by our benchmark. PFIG only holds debt issued by companies with strong fundamentals, and weights holdings based on issuer strength. The last fund, VCIT, is a plain-vanilla fund that only holds debt with 5-10 years to maturity.
Of the broad market products, VCIT, unsurprisingly, has the longest maturity and duration as well as the highest yield: Its 3.1% YTM, easily trumping ITR, CIU, PFIG, snf SKOR. CIU and ITR each allocate more than 50% of their portfolios to bonds expiring in less than 5 years, and PFIG allocates about 44% to the shorter-term market that VCIT excludes by rule. CIU overweights bonds rated AAA. PFIG heavily overweights industrial debt and excludes utilities. CIU also underweights industrials to make room for its foreign and supranational debt.
The key difference between the two groups of target-maturity funds is selection and inclusion. The BulletShares suite pulls from all sectors, and use callable bonds to achieve their various maturities. The ex-financial iBonds suite excludes financial debt, and have a bias to higher-quality credit. They exclusively hold bonds expiring in the year of their stated maturities. The most obvious impact of their target maturities is on their weighted average maturities, yields and effective duration. The highest maturities, yields and durations go along with the furthest target years, though the maturity and duration of each fund will decrease over time as their target dates approach. These target-date funds can be used as building blocks for an income ladder. (Insight updated 09/22/17)