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ETF Specialist

Corporate Bonds: Is There Upside?

Great past returns with an uncertain future.

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Corporate bonds have had a very consistent performance record.  iShares iBoxx $ Investment Grade Corporate Bond (LQD) returned 12.1%, 9.1%, 8.9%, and 11.7% per year from 2009 to 2012. Is this level of performance realistic going forward? We think the answer is no. That doesn't mean you should avoid corporate bonds, but you should have realistic expectations about future returns.

Corporate Bond Basics
High-quality corporate bonds offer relatively safe income and typically yield more than United States Treasury bonds because of their credit risk. Long-term investors could own LQD as part of a diversified-bond allocation, and tactical investors could own this exchange-traded fund when they feel the corporate-bond market is underpriced versus Treasuries. This fund holds investment-grade paper with an average rating of BBB. Still, that does not make the fund immune to losses, even if the actual creditworthiness of its underlying companies remains unchanged. Corporate spreads can widen, inflicting losses on funds like this one, because of factors such as liquidity and changing opportunities in other areas of the fixed-income market.

Timothy Strauts does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.