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Corporate bonds tend to pay higher yields than treasury bonds and are more popular for income investors. Here we'll look at the best corporate bond ETFs.
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Contents
Introduction – Why Corporate Bonds?
Companies issue bonds to investors to pay for future projects and R&D because it's typically a cheaper stream of funding than bank loans. This corporate debt provides capital for businesses while giving investors the opportunity to earn regular interest payments higher than a savings account. Debt financing is preferable to issuing stock because the company does not have to give up any ownership with the former.
Corporate bonds are safe so long as the company is able to pay its debt obligations; a company's assets may be used as collateral. This increased credit risk is why corporate bonds tend to pay higher yields than safer treasury bonds backed by the government. High-credit-quality corporate bonds are considered investment-grade, as opposed to riskier high-yield or “junk” bonds.
Bonds offer downside protection in a diversified portfolio, though treasury bonds are better suited for this purpose as opposed to corporate bonds. Corporate bonds are again more popular for using interest payments as regular income, as their yields are typically higher than that of treasuries.
ETFs pool individual bonds together and trade on exchanges. Below we'll check out the best corporate bond ETFs.
The 3 Best Corporate Bond ETFs
Below are the 3 best corporate bond ETFs.
LQD – iShares iBoxx $ Investment Grade Corporate Bond ETF
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is the most popular ETF for intermediate- to long-term corporate bonds with over $55 billion in assets. The fund seeks to track the Markit iBoxx USD Liquid Investment Grade Index. This ETF has an average maturity of 14 years and an expense ratio of 0.14%.
VCIT – Vanguard Intermediate-Term Corporate Bond ETF
One of the most popular corporate bond ETFs is the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and for good reason. The fund has nearly $40 billion in assets and an expense ratio of only 0.05%. The ETF seeks to track the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index and has an average weighted maturity of 8 years.
VCSH – Vanguard Short-Term Corporate Bond ETF
Those seeking short-term corporate bonds to be a bit more conservative will enjoy the Vanguard Short-Term Corporate Bond ETF (VCSH). The fund has over $30 billion in assets and seeks to track the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. This ETF has an expense ratio of 0.05% and an average weighted maturity of 3 years.
Where To Buy Corporate Bond ETFs
All the above corporate bond ETFs are available at M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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About John Williamson, APMA®
Analytical data nerd, investing enthusiast, fintech consultant, Boglehead, and Oxford comma advocate. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.
