Good quality corporate bonds are not doing much to boost investor confidence this year. For example, the widely followed Markit iBoxx USD Liquid Investment Grade Index is down 5.18% year-to-date, adding another layer of frustration to the 2021 fixed income market.
However, 2022 could bring better things with higher quality companies, especially if downgrades and defaults remain low. One idea to consider is WisdomTree U.S. Corporate Bond Fund (CBOE: WFIG). WFIG tracks the WisdomTree US Corporate Bond Index.
WFIG’s methodology is relevant at a time when experts are advising investors not to bet on corporate bond capital appreciation in 2022 and instead focus on coupon income.
“Although returns varied, there was a common denominator: coupon income was the primary driver of total returns, not price appreciation. We expect this trend to continue in 2022,” says Collin Martin of Charles Schwab.
While the claim that corporate bond price appreciation may be weak next year may prove to be correct, it does underscore the appeal of WFIG, as the WisdomTree US Corporate Index Bond is looking for valuation opportunities, which could put investors in a position to capitalize on some bonds that are currently undervalued.
Even though there are modest price cuts, the WFIG case is not out the window. The WisdomTree ETF has quality trends and beats the aforementioned Markit iBoxx USD Liquid Investment Grade Index by more than 40 basis points year-to-date.
“The prospect of modest price declines doesn’t mean investors should avoid investing in corporate bonds as the start of a new year approaches,” adds Martin. “We suggest investors take a more cautious approach and not overweight any of the riskier parts of the market, while focusing on the near to mid-term maturities in the investment-grade corporate bond market to help limit interest rate risk.
When it comes to coupon income, WFIG ticks this box because the fund’s index, more so than its traditional rivals, is able to identify corporate bonds with favorable income characteristics. This is something to consider at a time when income is hard to come by.
Federal Reserve policy “makes us a little more cautious about lower-rated investments like high-yield bonds and bank loans, but investors can still view them with moderation. More importantly, if rates rise in 2022 as we expect, this should provide investors with the opportunity to secure higher returns than they have seen in over a year,” notes Schwab’s Martin.
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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.