iBoxx Corporate Bond Fund

IBoxx Corporate Bond Fund (NYSE:HYG)

For the first time in years we started looking at Corporate bond funds, mid last year. Corporate bond markets are holding the sale of the century, it seems. Prices have not been more favourable since the Great Depression, say some pundits.

Investment grade credit looks like extremely good value.

Why are we looking at the corporate bond funds?

Investors anxious for decent returns, or yield, are having to look beyond cash. With the Fed and Bank of England Bank rate at its lowest level in years,savers are hard-pushed to get any return at all. TStock-market investors are still smarting from last years loses and dividends from blue chips are being cut left, right and centre.

We are certainly in recession, but the market seems to be pricing in something worse. The gap (spread) between the yield (return) on US investment-grade bonds and Treasuries (US government-backed bonds), hit a record in December and is still at levels last seen in the 1930s.

Against all this gloom, typical yields on corporate bonds average between 5% and 7% on high-grade bonds and an eye- catching 10% or more on riskier high-yield bonds. Analysts at Morgan Stanley estimate that prices for US investment grade corporate bonds imply a default rate many times higher than the worst rate in any  previous five-year period.

Of course, bond markets might be right to price in such a drastic scenario. Its true that, several big companies have already hit the wall in 2009, and the carnage will most likely continue. There's also the danger that deflation will be more short-lived than investors fear, pushing up yields across all asset
classes. Nonetheless, corporate bonds look attractive right now. However it is important that you choose the right way to get exposure to them.

Big global, bond buyers tend to be institutions such as pension funds, banks and hedge funds. They are aiming for a decent return, taking account of the bond's risk, and what they could earn elsewhere. As a rule of thumb, the less appetite these investors have for lending companies money by buying bonds,as
was the case in 2008,the lower prices go and the higher the yield.  Hence the current opportunity to buy bonds cheaply.

Individuals will usually be better off using a fund rather than trying to buy the corporate bonds directly. This is because, higher-yielding bonds are expensive and hard to trade and the jargon surrounding bonds is complex and confusing to the novice investor. We have identified two exchange traded funds that can give you exposure to this market, cheaply and easily.

For dollar investors, the iShares iBoxx Corporate Bond Fund (NYSE:HYG), which yields just over 8%, with an expense ratio of 0.5%, will give you good diversified exposure to corporate bonds.

TOP 10 HOLDINGS as of 1/27/2009
 
% of Fund Name Coupon Maturity Ratings (Moody's/S&P)
3.04% BARCLAYS TREAS MONEY MKT CLS I N/A  N/A/N/A
2.70% CROWN AMERICAS LLC 7.75 11/15/2015 B1 /B 
2.67% DOLLAR GENERAL CORPORATION 10.62 7/15/2015 Caa1 /NR 
2.63% DIRECTV HOLDINGS LLC 7.62 5/15/2016 Ba3 /BB 
2.62% MIRANT NORTH AMERICA LLC 7.38 12/31/2013 B1 /B- 
2.62% WINDSTREAM CORP 8.62 8/1/2016 Ba3 /BB 
2.60% DAVITA INC 7.25 3/15/2015 B2 /B 
2.58% MGM MIRAGE INC 13.00 11/15/2013 Ba1 /BB 
2.57% COMMUNITY HEALTH SYSTEMS INC 8.88 7/15/2015 B3 /B 
2.56% CONSTELLATION BRANDS INC 7.25 5/15/2017

If you want the prospect of high dividends and are comfortable that the companies in the fund will remain solvent, then

Buy IBoxx Corporate Bond Fund (NYSE:HYG) up to $77