Corporate Bond ETFs: The Complete Guide

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Kent Thune
5 min read

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Income investors seeking competitive yields without taking excessive risk may find corporate bond ETFs attractive as the Fed started lowering interest rates and an economic soft landing appears achievable.

In the last two years, investors have enjoyed high-yielding money market funds and short-term Treasury securities. But as these yields begin to fall with cooling inflation, exchange-traded funds investing in corporate debt can be a smart alternative.

In this article, we provide a primer on corporate bond ETFs, as well as the pros and cons of investing them and a breakdown comparing corporate bonds to Treasuries bonds.

What Is a Corporate Bond ETF?

A corporate bond ETF is an exchange-traded fund that tracks either passively tracks an index basket of corporate debt securities or actively attempts to outperform an index benchmark. This makes these bond funds an accessible way for investors to gain exposure to the corporate bond market without having to buy individual bonds.

Corporate bond ETFs can target specific sectors (e.g., financials or industrials), credit quality (investment-grade or high-yield bonds), or maturities (short-term or long-term). This flexibility makes them appeal to a wide range of investors.

5 Top Corporate Bond ETFs by AUM

Ticker

Fund

Expense Ratio

AUM

SEC Yield

VCIT

Vanguard Intermediate-Term Corporate Bond ETF

0.04%

$51.1B

4.66%

VCSH

Vanguard Short-Term Corporate Bond ETF 

0.04%

$35.7B

4.29%

LQD

iShares iBoxx $ Invmt Grade Corp Bd ETF 

0.14%

$30.7B

4.73%

JPST

JPMorgan Ultra-Short Income ETF 

0.18%

$26.1B

4.90%

IGSB

iShares 1-5 Year invmt Grd Corp Bd ETF

0.04%

$21.1B

4.35%

Data as Oct. 4, 2024.

Pros and Cons of Corporate Bond ETFs

When considering corporate bond ETFs as part of an investment strategy, it's important to weigh their benefits and potential drawbacks. These ETFs offer diversified exposure to the corporate bond market, providing income and accessibility for investors. However, like any investment, they come with specific risks, including interest rate sensitivity and credit risk.

Pros

  • Diversification: ETFs offer exposure to a broad basket of corporate bonds, reducing the risk associated with individual bond defaults. For investors with smaller capital, this level of diversification would be difficult to achieve by purchasing individual bonds.

  • Liquidity: Corporate bond ETFs are traded on exchanges, providing intraday liquidity, which means investors can buy or sell them at any time during market hours, unlike individual corporate bonds, which may have less frequent trading and higher transaction costs.

  • Accessibility: ETFs lower the barrier to entry for retail investors, providing access to the corporate bond market without the need for deep expertise or large sums of money.

  • Lower costs: ETFs typically charge lower management fees compared to bond mutual funds.

  • Income generation: Corporate bonds generally offer higher yields and greater long-term returns than government bonds (like U.S. Treasuries), making corporate bond ETFs an attractive option for income-seeking investors.

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