Fixed Income: U.S. - Corporate Investment Grade Short-Term
Investors have a good range of choices among the US corporate investment grade short-term fixed income ETFs. iShares’ CSJ offers a broad basket of representative bonds that are very
“VCSH, CSJ and SCPB trade very well in retail and institutional sizes.” easy to trade. The fund’s exposure differs from our benchmark mostly along sector lines: CSJ underweights industrial and financial corporate issues to make room for supranational debt issued by entities like the European Investment Bank, foreign agency debt, and foreign sovereigns. Still, the fund generally takes less risk than our benchmark, as it overweights AAA-rated securities.
Vanguard’s VCSH offers a more typical range of corporate bonds without the supranational exposure. Its chief difference from the market is definitional: VCSH defines “short term” as 1-5 years, while we mark it at 1-3 years. This distinction produces predictable biases toward higher interest rate risk and higher yield, and has also led to lower total returns lately. A third option, SSgA’s SCPB, mirrors our benchmark almost perfectly, with identical exposures to the 1-3-year investment-grade corporate debt market. VCSH, CSJ and SCPB all have very large asset bases—over $3B—and all three trade very well in retail and institutional sizes.
Guggenheim and iShares target date suites round out the segment. These funds are designed to act like bonds held to maturity. They have planned termination dates; the funds’ portfolios decrease in maturity and duration as they approach their respective target dates. Aside from this key distinction, they all offer well-balanced exposure from a sector and credit-risk perspective. Guggenheim’s BulletShares suite has decent assets (over $500M) and can be fairly traded at retail quantities, though they’re not designed for large or frequent traders. On the other hand, iShares’ iBonds suite has less assets and struggles in liquidity, so trade with care. (Insight updated 11/22/17)
All Funds (17)
SPSB $3.32 B 3321917834.4 Cheap and market-like
CSJ $11.95 B 11948231555 Hugely Popular
SLQD $625.95 M 625948650 Higher yield
BSCI $993.98 M 993978450 Matures in 2018
BSCJ $1.04 B 1035886950 Matures in 2019
IBDH $339.03 M 339029550 N/A
IBDK $427.5 M 427499120 N/A
VCSH $21.67 B 21672276401.85 Large & Liquid
IBDB $99.81 M 99811530 Matures in 2018
IBCC $73.88 M 73880700 Ex-financials, 2018 maturity target
LDRI $34.88 M 34882400 N/A
SFIG $4.98 M 4982140 N/A
SUSB $9.98 M 9975760 N/A
SCPB $3.16 B 3162868530.6 Cheap and market-like
IBCB $34.83 M 34825000 Ex-financials, 2016 maturity target
IBDA $65.54 M 65539500 Matures in 2016
BSCF $354.47 M 354468000 Matures in 2015
ETF.com Grade as 11/16/17
Fixed Income: U.S. - Corporate Investment Grade Short-Term
ETF.com Efficiency Insight
All of the funds in the US Corporate Investment Grade Short-Term segment deliver their underlying indexes without undue costs or risks.
In today’s low-yield environment, fees for
“SCPB and VCSH are the low-fee leaders, charging 12 bps each” funds with lower risk profiles—like all of those in this segment—may matter more than ever. Long-term investors most concerned with expense ratios can look to SSgA’s SCPB and Vanguard’s VCSH as the low-fee leaders, charging 12 bps each. The remaining funds are also reasonably priced. Guggenheim’s BulletShares suite is a bit more expensive at 24 bps.
By AUM, the funds are clustered in two groups: those with large asset bases and those with adequate asset bases. The large group contains three extremely well-established funds—CSJ, SCPB and VCSH—with assets well in excess of $3B each. The Guggenheim BulletShares funds have assets in the $600M vicinity, enough to negate closure risk until the planned termination of these ETFs.
One fund stands out with respect to how well (or poorly) its tracks its index: CSJ shows extremely little variation, but its median tracking difference is about twice its expense ratio, which is more than we’d like to see. That said, it has been very consistent. The BulletShares suite generally lag their indexes by about their expense ratios, but have shown some volatility over the past two years, making their true holding costs difficult to predict. Two funds from the iShares’ iBond suite have yet to accumulate enough history for full tracking performance evaluation.
The main knock on VCSH is the fund’s lagged holdings display which prevents investors from seeing their holdings in real-time and costs the fund points in transparency.
SLQD is the newest offerings from iShares so little is known about their Efficiencies. Given iShares’ strong franchise, they are likely to be around. (Insight updated 11/22/17)
ETF.com Tradability Insight
Six of the 11 ETFs in the US Corporate Investment Grade Short-Term segment—CSJ, VCSH, SCPB, BSCF, BSCH, and BSCG—can be traded easily and cheaply. CSJ, VCSH, and SCPB stand out
“SCPB is the clear standout” in particular, with extremely tight bid/ask spreads that average about 1-3 bps and median daily dollar volumes of over $20M. This kind of liquidity should even appeal to active traders.
Funds in the Guggenheim BulletShares suite can be fairly traded at retail levels, but larger orders could be pricey. All six funds trade at least $3M on most days with spreads average 9 bps, which aren’t terrible given that these funds are expressly designed to be bought and then held until the planned termination date. Still, we’d recommend using limit orders to help ensure the spread you receive isn’t worse than the average. The three funds get low Tradability scores because they trade poorly in large blocks. Those investors who wish to trade in size should reach out to a liquidity provider or to the issuer for help with execution.
iShares’ iBonds–iShares’ term bond offerings–suite see far less volumes and much wider spreads. So trade with even greater care. (Insight updated 11/22/17)
ETF.com Fit Insight
What does “short term” mean in the context of corporate investment grade short-term ETFs? While there’s no universal standard, two funds align with our benchmark’s
“SCPB meanwhile tracks an index thats identical to our benchmark” 1-3-year definition of short-term exposure—iShares’ CSJ and SSgA’s SCPB. The others differ by design and are viable choices despite their low Fit scores.
CSJ holds a broad array of short-term bonds from corporate issuers in the industrial, finance and utility sectors. While it holds these sectors in marketlike proportions, the fund underweights all three to make room for supranational and foreign agency debt that our benchmark excludes. Compared with our benchmark, the fund aligns well on interest rate risk but takes less credit risk, as it bulks up on bonds rated AAA. Its cautious risk profile shows up as low beta to our benchmark, as well as lower yield. SCPB meanwhile tracks an index that’s identical to our benchmark, so it conforms extremely well to our view of the space.
Vanguard’s VCSH includes bonds in the 1-5-year range rather than our benchmark’s 1-3-year range. Vanguard’s maturity range doesn’t make it a bad fund by any stretch, but it does increase the fund’s maturity, duration and yield relative to our benchmark. Aside from dialing up a bit more interest rate risk, the fund matches the short-term corporate space extremely well. Its sector alignment is excellent—industrials and financials dominate—and it avoids CSJ’s supranational exposure. The fund takes marketlike credit risk too, rounding out its posture as a plain-vanilla fund with a longer definition of “short term”—a position that has boosted total returns lately.
Like VCSH, SLQD reaches further out on the yield curve (0-5 years) relative to our benchmark (1-3 years). This resulted in a higher duration and yield–second highest in the segment, second only to VCSH. However, if you are willing to take on duration risk and seeking yield, VSCH is a more established choice than SLQD. There simply hasn’t been much investor interest in SLQD.
Guggenheim’s BulletShares suite and iShares’ iBonds suite also deliver on their stated goals even if they differ from our benchmark. These funds aim to act like individual bonds held to maturity rather than the more typical bond fund that maintains perpetual exposure to its target maturity. The bullet maturity funds follow a path of shortening maturity and decreasing duration as they move toward planned termination—maturity, in other words—in 2015, 2016 and 2017, respectively. They give every indication they’re on course with regard to maturity, and otherwise deliver well-balanced exposure along credit and sector lines. In short, they’re doing their job. (Insight updated 11/22/17)