With two interest rate hikes already under the Federal Reserve’s belt and more on the way as the central bank seeks to dampen inflation, 2022 is proving to be a brutal year for fixed income investors. .
Corporate bonds, whether investment grade or not, are not immune. However, it looks like investors are eating into corporate debt again, which could be positive for related exchange-traded funds, including the Franklin Liberty Investment Grade Corporate ETFs (FLCO).
FLCO, which turns six in October, is actively managed and is trying to outperform the Bloomberg US Corporate – Investment Grade Index. In addition, FLCO could be in the right place at the right time as investors show signs of rethinking corporate bonds.
“This is a reversal from the start of the year, when investors sold off even the highest quality debt. The turnaround highlights the tensions weighing on financial markets. In recent weeks, investors have been become more confident about the Federal Reserve’s path to raise interest rates to fight inflation – and more worried that as a result growth has started to slow,” Matt Grossman reported for The Wall Street Journal. .
One of the reasons investors might reconsider corporate bonds today is the fact that even if the Fed raises rates, real yields are still low. FLCO is relevant in this conversation because the ETFs exercise for 30 days SECOND yield of 3.92%, based on issuer data. That’s well above what investors earn on 10-year Treasury bills and most aggregate bond funds.
“Debt from U.S. companies with relatively strong financial profiles offers investors yield premiums, or spreads, about 1.31 percentage points more than Treasuries offer, according to data from the Bloomberg index. That number hit 1.49 percentage points a few weeks ago, but has fallen slightly as more investors seize on corporate debt as an alternative to the swoon stock market,” according to the Journal.
The $882.11 million FLCO holds 158 bonds and has an average duration of 7.42 years, which is below the benchmark and puts the fund in medium-term territory. FLCO offers some exposure outside the United States, with domestic issues accounting for two-thirds of the fund’s portfolio. Based on geography, FLCO is much more diversified than its benchmark. More than 88% of FLCO’s holdings are rated A or BBBindicating that the credit risk with this ETFs is not significant.
For more news, insights and strategy, visit the Volatility Resource Channel.