For investors, a move into a short-dated investment grade (IG) credit provides a material increase in yield returns versus government bonds, but risk exposure can be limited. The fund that can offer the highest duration-adjusted returns (yield to worst/duration) is the SPDR Bloomberg Barclays 0-3 Year U.S. Corporate Bond UCITS ETF. Risk is constrained by the following factors:
- The duration on the fund is just 1.49. So price losses on a yield rise of 100bp will still be more than offset by the yield to worst of over 2%.
- The Fed is currently buying IG corporate bonds out to 5 years in maturity, meaning market dislocations such as those seen in March are far less likely.
- Risk within the fund is limited with 62% of bonds rated A or above1 and only 3.25% in energy, a current concern given the low oil price.
The standout in terms of yield returns, in excess of 9% presently, is the SPDR Bloomberg Barclays 0-5 Year U.S. High Yield Bond UCITS ETF. Of course, the bonds are below investment grade and so have a higher default risk. That said, fund risks are limited by some of the same factors as the short corporate fund:
- The short duration of the fund, at 2.22 years, implies limited price losses if yields start to rise.
- The exceptional running yield on the fund is a powerful offset to losses.
- The Fed is also buying high yield debt. Details remain a little thin on what the central bank will buy but certainly IG bonds that have recently been downgraded appear the main target. This should act as a brake on the value of fallen angels hitting the high yield market. The Fed has also said that it will buy high yield ETFs, which should also support the market to some degree.
How to play these themes:
Investors can gain access to the above themes with SPDR ETFs. To read more about these ETFs, including their full performance histories, please follow the links below:
SPDR Bloomberg Barclays 0-3 Year U.S. Corporate Bond UCITS ETF
SPDR Bloomberg Barclays 0-5 Year U.S. High Yield Bond UCITS ETF