Phillip Yoo: IShares iBoxx $ Investment Grade Corporate Bond (LQD) is a solid option for market-cap-weighted exposure to U.S. dollar-denominated debt with more than three years remaining until maturity. This exclusion of short-term bonds gives the fund greater interest-rate risk than most of its actively managed peers in the corporate bond Morningstar Category. However, the strategy has the backing of BlackRock's capable indexing team and a durable cost advantage, warranting a Morningstar Analyst Rating of Bronze.
Roughly one third of the portfolio is invested in the banking sector, which is a source of risk. The average sector exposure has been around 25% of the portfolio from 2009 to 2013, according to Morningstar data. Any negative developments in this sector could hurt the performance. Its market-cap-weighting steered the fund toward A- and BBB-rated financial institution bonds. These bonds have low default risk, and offer a higher yield than Treasury securities with comparable terms.
The portfolio's exclusion of shorter-dated securities increases the fund's interest-rate-risk. Its duration of 8.5 years, as of October 2017, was approximately two years longer than the category average. This duration implies that if the rate curve abruptly experiences a parallel shift by one percentage point, this fund could lose approximately 8.5% of its value.
The managers have kept the fund's performance close to its index. Over the trailing five years through October 2017, the fund trailed the Markit iBoxx USD Liquid Investment Grade Index by 0.21% annually, in line with the expense ratio of 0.15%. This five-year return is on par with the category average.