It looks like the worst is finally over for bonds, which means it’s finally time to look at allocation to fixed income plays. of iShares ETF of large-scale corporate bond investment in USD (NASDAQ:PRACTICE) is an attractive investment option for investors seeking exposure to high quality fixed income securities, although it still has credit risk, which I remain concerned about. The fund aims to replicate the performance of the ICE BofA US Corporate Index by providing a diversified portfolio of investment-grade dollar-denominated corporate bonds. With its low cost, broad diversification and reliable management team, USIG is a compelling choice for asset allocation.
USIG was launched in 2007 by BlackRock (BLK), a global leader in investment management, risk management and advisory services. The fund has a gross expense ratio of 0.04%, making it a cost-effective choice for investors seeking broad exposure to the US bond market. The fund held approximately 10,000 different bonds and had net assets of approximately $9.2 billion, reflecting its broad diversification and significant size.
The fund is designed to provide investors with exposure to a broad range of US investment grade corporate bonds of various maturities, from 1 to 10+ years. Its main objective is to provide income while preserving capital. The fund’s 30-day SEC yield stands at 6.16%, highlighting its potential to generate regular income for investors. The overall dividend yield, while not at the top, is historically above average.
USIG’s portfolio is quite diversified, with the largest single holding accounting for just 2.07% of the fund’s total assets. This broad diversification helps to mitigate the potential impact of the default of any single issuer on the fund’s total performance.
Sector composition and weightings
The fund’s sector weightings reflect the broad diversification of its portfolio. The banking sector represents the bulk of the fund’s assets, likely reflecting the sector’s large debt issuance and strong credit ratings. Other important sectors in the fund’s portfolio include non-cyclical consumer, communications and energy.
When comparing USIG to its peers, it is important to consider factors such as expense ratios, portfolio composition, credit quality and yield. For example, the iShares iBoxx $ ETF of investment-grade corporate bonds (LQD) is another popular investment-grade corporate bond ETF. However, USIG has a lower expense ratio (0.04% vs. 0.14% for LQD), more diversified portfolio and a lower duration, which means lower interest rate risk.
Another peer to consider is the SPDR® Portfolio Intermediate Term Corporate Bond ETF (SPIB), which also provides exposure to investment-grade corporate bonds. However, SPIB focuses on bonds with maturities between one and ten years, limiting interest rate risk but also potentially limiting its yield.
The funds have performed mainly in-line.
The pros and cons of investing in USIG
Investing in USIG offers several advantages. First, the fund provides broad exposure to the US investment grade corporate bond market, providing high levels of diversification. Second, USIG’s low expense ratio makes it a cost-effective choice for bond exposure. Third, the fund’s high-quality bond holdings provide a degree of safety for investors, as investment-grade bonds are considered relatively low-risk.
However, investing in the iShares Broad USD Investment Grade Bond ETF also carries some risks. The performance of the fund is sensitive to changes in interest rates; when rates rise, bond prices tend to fall, which could negatively impact USIG’s performance. Additionally, while the fund’s holdings are investment grade, nearly half are rated BBB, the lowest investment grade rating. This means that in periods of economic downturn, these bonds may be relegated to junk status, potentially causing a decline in the value of the fund. I remain broadly concerned about this, though clearly my timing has been wrong so far.
Conclusion: To invest or not to invest?
While the fund carries some interest rate and credit risk, its broad diversification, low costs and potential for income generation make it a worthy consideration for many investors, especially given falling inflation and a Fed that it can finally be done by increasing interest rates. Just keep credit risk in mind in case things turn south, as they inevitably do.