This Bond Fund Effectively Combines Quality and Value

Benjamin Joseph: IShares Edge Investment Grade Enhanced Bond ETF IGEB effectively combines quality and value in its portfolio construction approach. This gives this fund a good chance to beat its category benchmark, the Bloomberg Barclays U.S. Corporate Bond Index. Within each credit-rating bucket lower than AAA, the fund filters out the issuers that BlackRock estimates have the highest probability of default, effectively removing 20% of BBB rated issuers and 10% of A and AA rated issuers. It then uses an optimizer to maximize the portfolio's default-adjusted spread score, subject to several constraints designed to limit risk relative to the starting universe. This dual focus on quality and value should allow the fund to boost returns while keeping risk in check.

The fund takes greater credit risk than the broad, market-value-weighted Vanguard Total Corporate Bond ETF VTC, as its pursuit of yield, defined as default-adjusted spread, appears to have a stronger influence on the composition of the portfolio than its quality screen. However, its quality filter and risk constraints keep it from loading up on the riskiest investment-grade issuers.