ETF Of The Week: Short Bonds Soar (SLQD)

Assets in the iShares ETF skyrocket 35% on rate hike fears.

Welcome to ETF of the Week, a designation given to the most newsworthy or notable fund of the past seven days.

As interest rates rise, investors have scrambled to protect their portfolios. That's the best explanation I can come up with for why assets in the $1.23 billion iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) rose a whopping 35% this week, the largest increase any ETF with more than $200 million in assets under management saw in that time period.

On June 13, the Fed raised interest rates and signaled that two more increases were likely this year. Rate hikes are generally a good thing, in that they signify a robust economy. But they can also wreak havoc on bond prices, since bond prices and interest rates are inversely linked.

Low Duration Good

Short-term bonds typically have lower duration, which is a measure of how sensitive a bond is to interest rate moves. (Lower duration means less sensitivity.) So when the Fed hikes rates, investors often turn to shorter-term bonds, because their prices tend to hold up better than those of longer-dated issues.

Although SLQD's duration of 2.30 is about middle-of-the-pack for short-term bond ETFs, it's substantially lower than, say, the Vanguard Long-Term Corporate Bond ETF (VCLT), which has a duration of 13.43.

It's also lower than SLQD's nearest competitor, the $21 billion Vanguard Short-Term Corporate Bond ETF (VCSH), which has a duration of 2.86.

Broader Mix Of Bonds

Essentially, SLQD is a short-term slice of the $33 billion iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD). It tracks 995 investment-grade, U.S. dollar-denominated corporate bonds with anywhere from zero to five years remaining to maturity.

That's a broader swath of maturities than found in other short-term corporate bond ETFs, like the $4.3 billion SPDR Portfolio Short Term Corporate Bond ETF (SPSB), whose portfolio has an average weighted maturity of 1.97, compared to SLQD's 2.46 years. (However, SPSB has a shorter duration of 1.88; which, again, means that SPSB is less sensitive to interest rate hikes than SLQD.)

Most of SLQD's holdings are in the U.S., though the fund does have some representation from the U.K., Canada and Japan (6%, 4% and 3%, respectively). More than half, or 53%, of its corporate bonds are from the industrial sector, while issues from financial institutions make up 43% of SLQD's holdings.

When 1 Basis Point Matters

Interestingly, though both VCSH and SPSB are larger and older than SLQD, the iShares fund undercuts them on price by 1 basis point. SLQD's expense ratio is just 0.06%, compared to VCSH and SPSB's 0.07%.

That 1 basis point matters. In fact, it may be the root cause behind why so much money has flowed into SLQD, specifically, over other short-term bond ETFs. Over the past week, SLQD has taken in just under $400 million in new net inflows; VCSH and SPSB, however, have lost $70 million and $6 million, respectively.

Relative performance of the three funds, meanwhile, is pretty mixed. Year-to-date, SLQD has fallen 0.27%, while VCSH has fallen 0.46% and SPSB is up 0.06%.

Source: StockCharts.com; data as of July 5, 2018

Contact Lara Crigger at [email protected]