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Value or lack thereof is a trait often assigned to equities, but has applications throughout financial markets. For the uninitiated, that also includes corporate bonds.
Discussing value in the realm of investment-grade corporate bonds is pertinent today because with basic strategies accessing the asset class, value may be hard to come by. The widely observed Markit iBoxx USD Liquid Investment Grade Index is up 5.58% year-to-date. Plus, the Federal Reserve recently cut interest rates and with Fed funds futures implying another 100 basis points of cuts to come by the second quarter of 2025, it could become increasingly difficult to find value in high-quality corporate debt.
On the other hand, that endeavor isn’t possible. It’s actually relatively easy if advisors and investors opt for the right exchange traded funds. Those include the VanEck Moody’s Analytics® BBB Corporate Bond ETF (NYSEARCA: MBBB) and the VanEck Moody’s Analytics® IG Corporate Bond ETF (NYSEARCA: MIG).
Both ETFs follow Morningstar indexes with the dual objectives of identifying corporate bonds with appealing value traits and reduced probability of being downgraded.
Why Value Is Important with Corporate Debt
As advisors know, investment-grade corporates, even those with the highest grades, often offer yield premiums relative to Treasurys. Alone, that’s nice, but it’s even more appealing when adding in the point that highly rated corporates aren’t typical downgrade candidates.
On the other hand, above-average yields and strong credit quality – undoubtedly attractive traits – can lead to higher valuations. Interestingly, while value investing may be out of style with stocks, the opposite is true with corporate bonds where the most attractively valued issues have a history of outperforming their more expensive counterparts.
Chart Courtesy: VanEck
“The most attractively valued bonds within this $4.1 trillion asset class have significantly outperformed the broad market historically,” according to VanEck research. “In contrast, the most overvalued bonds have significantly underperformed the market. Value is measured by comparing the market pricing of a bond to its fair value, as calculated by Moody’s Analytics based on the bond’s forward-looking probability of default.”
Don’t Ignore Corporate Bond Value
Both MBBB and MIG have small helpings of junk bonds, potentially the result of the ETFs featuring exposure to ex-US bonds. Rest assured that the average investment-grade percentage in the funds is north of 88% and MBBB allocates almost 79% of its weight to domestic bonds while that percentage is over 72% in MIG.
Point is both MBBB and MIG grant income investors avenues for having their cake and eating it, too in the world of corporate bonds.
“The outperformance from focusing on attractively valued bonds can come from bond prices adjusting upwards towards fair value as well as the ability to capture higher yields relative to the risk taken. In addition, outperformance can also come from avoiding overvalued bonds where market prices adjust downwards towards fair value,” concludes VanEck.