Bonds can reduce risk in an investment portfolio. A fund such as SPDR Portfolio Short Term Corporate Bond ETF (SPSB) focuses on corporate bonds but reins in its credit and interest-rate risk by focusing on investment-grade issues with fewer than three years until maturity. This is a solid option for low-cost, efficient exposure to U.S. short-term investment-grade corporate bonds. Its conservative strategy keeps credit and interest-rate risk low and has a durable cost advantage over Morningstar Category peers. However, the exchange-traded fund has a subpar index-tracking record compared with peers. And its portfolio tilts heavily toward the financials sector, which can disproportionately impact performance. These considerations limit its Morningstar Analyst Rating to Bronze.
Nearly 45% of the portfolio is invested in the financials sector, which is a source of risk. In 2011, this sector represented less than a fourth of the portfolio. The growth of this sector was mostly driven by large U.S. banks. Since 2010, they have issued a record amount of debt to take advantage of low rates and meet strict postcrisis capital requirements. At the end of 2016, the total outstanding debt issued by the financial-services sector stood at $1.6 trillion. Consequently, market-cap-weighting steered the fund toward A and BBB rated financial institution bonds.
Adam McCullough, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.