Investing in bond ETFs can be an excellent way to earn income from your investment portfolio. One of the most popular types of bond ETFs is investment-graded bond ETFs, which offer a higher coupon interest rate to its holders than other types of bond ETFs.
In this article, we’ll take a closer look at the benefits and risks of this bond and explore how investing in high-grade bond ETFs can provide a low-risk, stable investment option for fixed-income investors.
What are High-Grade Bond ETFs
High-grade bond ETFs are exchange-traded funds that invest in bonds with high credit ratings issued by governments or corporations. These bonds are considered to be of high quality, with a low risk of default, making them a relatively safe investment option.
High-grade bond ETFs provide investors with exposure to a diversified portfolio of bonds, typically with maturities ranging from short-term to long-term. They can provide a stable income stream through the payment of interest or coupon payments, making them a popular choice for investors seeking low-risk investments.
How It Can Help Investors
Investors can diversify investment risks by buying bond funds or ETFs as an alternative to corporate bonds, with bond ETFs offering the lowest fees among bond funds.
High-grade bond ETFs track a bond index comprising bonds issued by governments and corporations, with investment grades Baa by Moody’s and BBB or above by Standard and Poor’s and Fitch.
These ETFs are credit-reliable and more liquid than high-yield bond ETFs, making them a secure investment option.
Pros and Cons
With the potential for higher returns also come greater risks. Here are some of the advantages and disadvantages.
- High-grade bond ETFs are relatively safe investments with low risk of default and offer a stable income stream through coupon payments.
- These ETFs can provide investors with exposure to a diversified portfolio of bonds, which can be an effective tool for diversifying investment risks.
- High-grade bond ETFs are more credit reliable and liquid than high-yield bond ETFs.
- High-grade bond ETFs generally have lower returns compared to other investment options such as stocks or high-yield bond ETFs.
- Interest rate risk can negatively impact the prices of high-grade bond ETFs, which may result in lower returns for investors.
- Liquidity risk may make it difficult to sell high-grade bond ETFs during a distressed market, which could lead to a loss of investment value.
- Credit risk, although low, is still a concern as high-grade bond issuers can still default on corporate debt, particularly in an economic downturn.
7 Best High-Grade Bond ETFs
These ETFs invest in high-quality bonds that are issued by governments or corporations with strong credit ratings. Here are the top 7 high-grade bond ETFs that can provide you with steady income and stability in your investment portfolio.
|Funds||Expense ratio||Fund size(USD)*||Yield||YTD returns*||Best for|
Vanguard Intermediate-Term Corporate Bond Index Fund(Nasdaq: VCIT)
Large-size, high yield and stable investors
iShares 5-10 Year Investment Grade Corporate Bond ETF(Nasdaq: IGIB)
Schwab 5-10 Year Corporate Bond ETF(NYSE: SCHI)
Low-cost, high yield and good return investors
iShares Broad USD Investment Grade Corporate Bond ETF(Nasdaq: USIG)
High yield investors
iShares iBOXX $ Investment Corporate Bond ETF(NYSE: LQD)
High yield and risk seekers
SPDR Portfolio Intermediate Term Corporate Bond ETF(Nasdaq: SPIB)
iShare ESG USD Corporate Bond ETF(Nasdaq: SUSC)
*Data available on Apr 04, 23
For return, the Schwab 5-10 Year Corporate Bond ETF (SCHI) is the best high-grade bond ETF, while for yield, the iShares Broad USD Investment Grade Corporate Bond ETF (USIG) is a great option, and the largest investment-grade bond ETF in terms of asset size is Vanguard Intermediate-Term Corporate Index Fund ETF (VCIT).
1. Vanguard Intermediate-Term Corporate Index Fund ETF(VCIT)
- Best for: Large-size, high yield, and stable investors
- Expense Ratio: 0.04%
- Fund size: USD41.22 billion
- Yield: 3.09%
- YTD return: 3.52%
The fund tracks the performance of the Bloomberg US 5-10 year Corporate Bond Index, a market-weight corporate bond index with an intermediate-term dollar-weighted maturity.
The fund invests in US dollar-denominated, investment-grade, fixed-rate, and taxable securities issued by utilities, industrial and financial companies worldwide. The security duration is 5-10 years on average. The fund invests at least 80% of assets in components from the index.
Top holdings include T-Mobile USA Inc., Deutsche Telekom International Finance B.V., Wells Fargo & Co, Citigroup Inc., JP Morgan Chase & Co, and AbbVie Inc.
2. iShares 5-10 Year Investment Grade Corporate Bond ETF(Nasdaq: IGIB)
- Best for: High-yield investors
- Expense Ratio: 0.04%
- Fund size: USD11.05 billion
- Yield: 3.09%
- YTD return: 3.54%
The fund tracks the components from the ICE® BofA® 5-10 US Corporate Index, a market-capitalization weighted index. The fund invests at least 80% in component securities and 90% of its fund assets in fixed-income securities of the index. Not more than 10% of net assets are invested in futures, options, and swap contracts.
10 top holdings of the fund include the Boeing Co., Anheuser Busch InBev Worldwide Inc., Bank of America Corporation, Verizon Communications Inc., Deutsche Telekom International Finance, JP Morgan Chase & Co., T-Mobile USA, Inc., The Boeing Co., WarnerMedia Holdings Inc., AbbVie Inc.
3. Schwab 5-10 Year Corporate Bond ETF(NYSE: SCHI)
- Best for: Low-cost, high yield and good return investors
- Expense Ratio: 0.03%
- Fund Size: USD4.99 billion
- Yield: 3.15%
- YTD return: 3.83%
The ETF aims to track, as closely as possible, the Bloomberg US 5-10 Year US Corporate Bond Index. The assets tracked comprise the US investment-grade, taxable corporate bonds with 5 to 10-year maturities with face values of outstanding USD300 million or above. Besides, at least 90% of net assets are invested in the securities. The fund suits to diversify risks incurred from stock or other investment portfolios.
Top holdings from the fund include Bank of America, Deutsche Telekom International Finance, WarnerMedia Holdings Inc., Amgen Inc., Wells Fargo & Co., JP Morgan Chase & Co., AbbVie Inc., The Boeing Company, Anheuser-Busch InBev Worldwide Inc., T-Mobile USA Inc.,
4. iShares Broad USD Investment Grade Corporate Bond ETF(Nasdaq: USIG)
- Best for: High yield investors
- Expense Ratio: 0.04%
- Fund Size: USD8.25 billion
- Yield: 3.21%
- YTD return: 2.54%
The fund seeks to track the securities component from the ICE® BofA® 5-10 US Corporate Index and its performance. Like other ETFs, the fund invests at least 80% of net assets in securities and at least 90% in fixed-income securities from the index. Besides, all investments are dominated in US dollars and listed in the domestic market.
Top holdings comprise BlackRock Cash Funds TreasurySL Agency XTSLA, CVS Health Corp., Anheuser Busch Companes LLC/Anheuser-Busch InBev Worldwide Inc., Goldman Sachs Group Inc., AT&T Inc., Bank of America Corp., The Boeing Company, T-Mobile USA Inc., WarnerMedia Holdings Inc.
5. iShares iBOXX $ Investment Corporate Bond ETF(NYSE: LQD)
- Best for: High yield and risk seekers
- Expense Ratio: 0.14%
- Fund Size: USD33.25 billion
- Yield: 3.18%
- YTD return: -4.47%
The ETF tracks the results of the Markit iBoxx® USD Liquid Investment Grade Index. It invests at least 80% of net assets in the component securities from the index and at least 90% in fixed-income securities from the ETF. Besides, the fund’s focus is on securities denominated in US dollars and listed in the domestic market.
The top holdings include WarnerMedia Holdings Inc., Goldman Sachs Group Inc., Anheuser Busch Companes LLC/Anheuser-Busch InBev Worldwide Inc., AT&T Inc., Bank of America Corp., BlackRock Cash Funds TreasurySL Agency XTSLA, CVS Health Corp., The Boeing Company, T-Mobile USA Inc.
6. SPDR Portfolio Intermediate Term Corporate Bond ETF(Nasdaq: SPIB)
- Best for: Low-cost investors
- Expense Ratio: 0.04%
- Fund Size: USD6.32 billion
- Yield: 2.8%
- YTD return: 2.16%
The fund seeks to follow the components of the Bloomberg US Intermediate Corporate Bond Index and invests at least 80% of net assets in the underlying assets from the index. The assets invested have maturities equal to or greater than 1 year but less than 10 years.
Major holdings include Oracle Corporation, Intel Corporation, John Deer Capital Group, Morgan Stanley, JP Morgan Chase & Co., Bank of America Corp., and Goldman Sachs Group.
7. iShare ESG USD Corporate Bond ETF(Nasdaq: SUSC)
- Best for: International investors
- Expense Ratio: 0.18%
- Fund Size: USD1.14 billion
- Yield: 3.01%
- YTD return: 2.92%
The investment seeks to track the Bloomberg MSCI US Corporate ESG Focus Index consisting of US dollar-denominated, investment-grade corporate bonds. The companies aim to include the environmental, social, and governance factors in business activities and daily operations.
The fund invests at least 90% of net assets in the assets from the index and up to 10% in futures, swap contracts, options, cash & cash equivalents, and securities outside the index.
Top holdings include the National Bank of Canada, Banco Bilbao Vizcaya Argentaria, S.A., Avangrid Inc., Salesforce Inc., Ecolab, Automatic Data Processing, Inc., Bunge Limited Finance Corp., BlackRock Cash Funds TreasurySL Agency XTSLA, Diageo Capital PLC.
Factors to Consider When Considering Investing in High-Grade Bond ETFs
1. Risk tolerance
Investment-grade corporate bond ETFs are secure and safe investments deemed by conservative or risk-averse investors looking for regular income streams and safe investments.
Retired investors spending on their nest eggs can invest their retirement savings to generate wealth while receiving bond income. However, bond investments, though secure, are riskier than fixed deposits or savings accounts as bond prices may go up and down due to interest rates and market changes.
2. Investment goals
Your financial objectives are crucial to your investment plans. If you are near retirement, you may be worried about seeing possible value drops in your portfolios due to market turbulences.
Financial experts suggest the best investment is to transfer most of your wealth into safer investments like high-grade corporate bonds or cash may cushion you from unnecessary value market fluctuations and preserve your source of income before retirement.
3. Time horizon
If you have a long working life, you had better be proactive in working on your retirement investment. Though less risky, bond ETFs generate fewer returns than other investments, such as stock ETFs, and are not an ideal investment tool for wealth accumulation.
Besides, returns from bond funds or ETFs cannot outweigh inflation in the long term and may erode your capital due to a loss of purchasing power. Investors should not invest all their savings into bond investments and consult their financial advisors for investment advice.
Corporate bond ETFs or funds can play a good hedge for your investment portfolio. In a repressed market or financial crisis, quality bonds continue to offer stable income to investors, while stocks may fail to do so.
Moreover, investment bonds can act as a price hedge on other risky securities like properties or stocks and reduce losses caused by these investments. Bond ETFs or funds act as an effective tool to diversify investment risks.
5. Costs and fees
Unlike other stock or bond funds, a bond ETF(not a high-yield bond fund) is a passively-managed fund without high administration costs and, therefore, charges fewer fees than active-managed funds. Expense ratios range from 0.03% to 0.2% on average less than 1% to 2% for actively-managed stock or high-yield bond funds. Fee savings reduces investment costs and, subsequently, enhance fund returns.
A best high-grade bond ETF provides multiple benefits, such as portfolio diversification, consistent income, and a hedge against market fluctuations. However, it may not suit active, long-term investors building aggressive portfolios for enhanced returns.
Investors should consult financial advisors to crave a viable and goal-oriented investment portfolio, including high-grade bond ETFs in investment combinations.
- High-grade bond ETFs invest in high-quality bonds issued by governments or corporations with strong credit ratings, making them a relatively safe investment option.
- Vanguard Intermediate-Term Corporate Bond Index Fund (VCIT) is an excellent option for large-size, high-yield, and stable investors.
- Investors seeking high-yield options can consider iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB) and iShares Broad USD Investment Grade Corporate Bond ETF (USIG).
- For low-cost options, Schwab 5-10 Year Corporate Bond ETF (SCHI) and SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB) are good choices.
- By diversifying your portfolio with high-grade bond ETFs, you can manage risk and achieve your investment goals.
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