Corporate bonds, including those rated investment grade, are among the bond segments that have been shaken by rising interest rates this year.
Following August’s consumer price index (CPI), it’s clear that the Federal Reserve may have no choice but to pursue aggressive rate hikes, but some experts believe there are plenty of opportunities in high-quality corporate bonds. This could imply that exchange-traded funds such as SPDR Bloomberg SASB Corporate bond ESG Select ETFs (RBND ) are worth considering.
RBNDwhich follows the Bloomberg SASB® US Corporate ESG Ex-Controversies Select Index, is one of a growing number of bond ETFs with ESG overlays. It could do RBND a compelling value proposition today.
“Investment-grade corporate bond yields are near multi-year highs, making them attractive to investors seeking income. While an economic downturn can negatively impact all businesses, investment grade corporate bonds should be better positioned than high yield bonds should market volatility resume,” noted Collin Martin by Charles Schwab.
RBND will be two years old in November, so it hasn’t been through a traditional recession yet. Of course, there’s no guarantee that such a scenario will happen, but if it does, RBND could be useful because of bonds’ reputation for recession protection.
In addition, companies benefiting from favorable conditions ESG credentials often have other characteristics, such as strong balance sheets and high credit ratings, that provide recession protection. These are points in favor of RBND in the event of an economic contraction. Another reason to consider RBND is that it currently offers attractive returns without significant credit risk – a combination that is often hard to find.
“A”-rated corporate bond yields are also up sharply this year, and investors can earn yields of 4% or more, on average, with maturities of seven years and longer. For investors who don’t want to tie up their funds for so long, average returns are still in the 3.75% range for maturities of three to five years,” added Martin.
Approximately 55% of RBND’s 459 holdings are rated A, AA or AAA, according to transmitter data. It is important to note that many ETF holdings are not in imminent danger of suffering credit downgrades.
“Companies rated as investors tend to have stronger balance sheets and more stable cash flows. While corporate earnings growth may still be challenging, a stronger balance sheet, such as the presence of ample liquidity, should allow investment grade rated issuers to better weather the storm,” Martin concluded.
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