Enterprising Investor Forum

Corporate Credit Wednesday, April 15, 2009

Despite a lot of suffering in the past years, Corporate Credit is starting to look attractive.  Most market commentators have been talking about this and that it is time to pick up some bargains with pretty good yields. However, as usual, the key question is how to do this and minimize risk exposure?

As most of our readers know, we still feel that we are probably only halfway out of the tunnel and that is why we would prefer to gain exposure through an ETF. One option could be the iShares iBoxx $ Invest Grade Corp Bond (LQD).

The important thing is to focus on Investment Grade companies and to make sure you have a margin of safety as, even the best companies, are being downgraded in this uncertain market environment. In any case, even though default risk is there also for these companies, the default rate on >BBB/Baa is quite low… currently around 5%. Therefore, there should be some room for exposure to this segment in most portfolios.

Fund summary from Yahoo!Finance:

The investment seeks investment results that correspond generally to the price and yield performance of a segment of the U.S. investment-grade corporate bond market as defined by the iBoxx $ Liquid Investment-Grade index. The fund typically invests at least 90% of assets in the bonds of the underlying index, and at least 95% of assets in investment grade corporate bonds. It may also invest in bonds not included in the underlying index. The fund may also invest up to 5% of assets in repurchase agreements collateralized by U.S. government obligations, and in cash and cash equivalents. It is nondiversified.

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