LQD: iShares iBoxx $ Investment Grade Corporate Bond
In 2002, the first fixed-income ETFs began trading, and perhaps no other fund represented such an important turning point for investors as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-77).
It launched alongside three Treasury ETFs, but Treasurys had always been a liquid market with few concerns about pricing or defaults. Investment-grade corporate bonds, though, were a different story.
Bonds don't trade on an exchange and investors can't get real-time pricing on individual issues. But ETF pricing is available in real time. While its underlying index tells one story, the price of LQD tells another story. It reflects the markets' real-time opinion of the value of its portfolio, and that offers all investors—even those who aren't investing in bonds—valuable information.
"When LQD launched, it really created the first way that investors could see what was happening in the bond market in real time. I think one of the biggest benefits it's provided since it launched is being a barometer for the corporate bond market," said Matt Tucker, head of the iShares Fixed Income Strategy team.
"It's a pioneer fund that created this concept of a visible fixed-income market and delivered it out to all investors," he added. For investors in the fund, it makes establishing a corporate bond position much easier and convenient due to the intraday trading, the ability to execute different types of orders and the ability to see a two-sided market, complete with bids, asks and spreads, Tucker says.
But the story of LQD is also one of liquidity, as its ticker implies. Tucker notes that from its 2002 launch through much of 2008, the fund traded an average of $20 million a day and was primarily used as a buy-and-hold vehicle by the retail and wealth markets. And then the financial crisis happened, and bond liquidity dried up.
It was during the crisis that institutions discovered LQD, Tucker says. By the fourth quarter of 2008, its average daily volume stood at $160 million, and currently stands at $320 million. Bond liquidity has continued to be an issue for investors, and that has had an impact on LQD's popularity.
"LQD is actually helping to solve the problem by delivering liquidity to the corporate bond market," Tucker said. "LQD is not the entire solution, but it's helping to address some of the market structure concerns people have today."