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ETF Specialist

An ETF for Diversified, Low-Cost Exposure to Investment-Grade Corporate Bonds

The fund is far and away the largest and most-liquid corporate-bond ETF.

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 iShares iBoxx $ Investment Grade Corporate Bond (LQD) offers diversified exposure to investment-grade corporate bonds. It may be a suitable satellite holding for investors who want fixed-income exposure with moderate credit risk and a higher yield than government bonds of similar, relatively long duration. Tactical investors could use this fund when they feel corporate bonds are inexpensive relative to Treasuries.

As of Aug. 22, 2016, the portfolio’s weighted average yield to maturity was 2.93%, nearly double that of the 10-year U.S. Treasury, which is arguably pretty good compensation for the increased credit risk that corporate bonds introduce. That is a reasonable comparison given that the fund and the 10-year Treasury have similar durations. It is worth noting, however, that at roughly 9.0 years and 8.6 years, respectively, both take on more interest-rate risk than the average corporate-bond mutual fund (7.1 years) or exchange-traded fund (6.1 years). Meanwhile, those groups typically carry even more rate risk than core bond funds in the intermediate-term bond Morningstar Category, which are typically benchmarked off of the industry-standard Barclays U.S. Aggregate Bond Index, whose duration was 5.5 years at Aug. 22. This fund’s duration clocks in at that comparatively long length because the Markit iBoxx USD Liquid Investment Grade Index upon which it is based holds no bonds with maturities shorter than three years, unlike more-conventional indexes that typically hold bonds with maturities of a year or longer. That may sound trifling, but bonds with maturities from one to three years in the industry-standard Barclays U.S. Corporate Investment Grade Index (which also holds bonds of smaller issuance), for example, comprise more than 20% of that benchmark’s market value and act as a counterweight to the more than 20% in ultra-long bonds that would otherwise further push out the index’s duration.

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