Published:
April 4, 2009
State
Street has just launched the newest
fund -- SPDR Barclays Long Term
Credit Bond (LWC) -- aimed
specifically at investment-grade
corporate bonds. Linked to the
Barclay's U.S. Long Credit Index, it
will track the performance of debt
issued by reliable companies like
AT&T, Boeing, Target and Kraft. The
portfolio contains a representative
sampling of about 60 holdings
overall, pulled mostly from the
industrial and utility sectors.
LWC is billed as having the longest
maturity of any corporate bond ETF
on the market. And the latest specs
show a modified duration of 10.6
years and an average maturity of
23.5 years. In fact, most of the
bonds in the portfolio aren't
scheduled to mature until 2030 or
later.
As you might expect, longer-term
bonds tend to offer better rates
than shorter-term bonds of similar
credit quality. And the fund's
underlying index sports an overall
yield to maturity of +8.1% -- about
double the payout from high-grade
corporate bonds at the short-end of
the yield curve.
However, those higher rates also
carry greater risks, as longer-term
bonds are much more sensitive to
interest rate fluctuations. A couple
half-point rate hikes might not mean
much to a 3-month Treasury, but they
could lead to a double-digit decline
in this portfolio.
Of course, corporate bonds have
already been beaten up over the past
year -- collateral damage from the
subprime meltdown and frozen credit
markets. But as we discussed last
month, unless default rates eclipse
those from the Great Depression,
valuations look highly attractive at
this point and yield spreads are off
the charts.
Sensing the worst is over, investors
are already becoming hungrier for
stronger yields. In fact, State
Street alone has reported more than
$800 million in net cash inflows
over the past two months into its 15
bond funds.
Unless the economy takes a dramatic
turn for the worse, trading should
stabilize and bond yields should
revert to the mean. Under that
scenario, long-dated investment
grade credit could actually
outperform stocks over the next few
years. And a supply shortage can do
nothing but help. According to T.
Rowe Price, the issuance of new
investment-grade credit has tumbled
nearly -30% over the past six
months.
LWC looks to be a natural
beneficiary of all this. The fund
wasn't the first ETF to test these
waters -- iShares iBoxx Investment
Grade Corporate Bond (NYSE: LQD) has
been around for years. But LWC
offers a higher yield and much less
exposure to the financial sector.
Not
that long ago we were celebrating
the introduction of the very first
bond ETF's. Now, they account for
roughly half of all new fund
launches. I can almost guarantee you
there will be more bond funds to
come, as issuers adjust their menus
to meet the fickle tastes of
investors.
Ordinarily, I would be hesitant to
invest at the long-end of the yield
curve under these conditions. With
interest rates sitting near historic
lows, they really have nowhere to go
but up. However, I see minimal
threat of a rate hike in the near
future, as it would undermine any
attempts to revive the feeble
economy.
Nathan Slaughter
Editor
The ETF Authority
About
The ETF Authority
The mission of The ETF Authority
is to help our readers identify today's most profitable ETFs and closed-end
funds. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on today's most
promising funds.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
To learn more about Nathan Slaughter's premium investing newsletter -- The
ETF Authority -- please
visit
this link.
|
