Investment Grade Corporate Bond ETF: A Safer Route for Bond Investors

The corporate debt market experienced unprecedented growth in 2020, driven by supportive monetary policies and strong investor appetite. During the third quarter alone, U.S. firms issued remarkable volumes of bonds. According to Dealogic data, investment-grade issuers like Apple Inc. and Gilead Sciences Inc. sold over $267 billion in debt instruments between July and September, while speculative-grade companies including Charter Communications Inc. and Occidental Petroleum Corp. issued more than $119 billion. Both figures represented the highest quarterly totals since 1995, extending what had already been a record year for corporate debt issuance.

The first half of 2020 had already set a benchmark with $822 billion in total corporate bond sales. The continued momentum through mid-year surprised market observers who anticipated a slowdown in the second half. This robust issuance environment, however, underscores an important reality: not all corporate debt carries equal risk.

Why Investment Grade Corporate Bonds Matter

For debt investors navigating heightened uncertainty, focusing on higher-quality securities becomes particularly prudent. Investment-grade rated bonds, by definition, carry lower default probabilities compared to below-investment-grade alternatives. This distinction becomes especially critical during market volatility, when weaker credits face amplified stress.

The iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) exemplifies this approach. The fund tracks the Markit iBoxx® USD Liquid Investment Grade Index, concentrating 95% of assets exclusively in investment-grade corporate bonds. This concentrated strategy directly addresses credit risk mitigation. Within a single fund, LQD provides exposure to over 1,000 high-quality corporate bonds, delivering both diversification and stability while maintaining income-generating potential.

Alternative Investment Grade Strategies

For investors seeking additional risk management layers, alternative vehicles offer complementary approaches:

ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG) tracks the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index. This fund maintains long positions in investment-grade corporate bonds issued by both U.S. and foreign-domiciled companies, with an added hedge mechanism against interest rate movements. The hedging component proves valuable during downturns when default probabilities spike.

Xtrackers Inv Grd Bd Intst Rt Hdg ETF (BATS: IGIH) operates similarly, tracking the Solactive Investment Grade Bond – Interest Rate Hedged Index. The fund allocates a significant portion of assets to U.S. dollar-denominated investment-grade corporate bonds while employing interest rate hedging to neutralize duration risk.

Both strategies underscore a central principle: investment-grade corporate bond ETF structures can effectively filter out elevated-risk securities while maintaining meaningful yield opportunities. Whether through concentration like LQD or through hedged implementations like IGHG and IGIH, these tools align with conservative fixed-income mandates without sacrificing return potential.