About the LQD ETF
Today is a new day at MacroHint.com.
While our specialty lies primarily in equities (stocks), we’re going to take a little time to introduce you to an exchange-traded fund (ETF) that is somewhat popular among the masses that caught our attention being that it is one of Soros Fund Management LLC’s largest portfolio holdings (only second to its largest reported position in Horizon Therapeutics), holding a 4.09% spot in the fund’s portfolio as of its latest 13F filing report during the time of this writing.
Isn’t this exciting?
Anyways, it might help to know just exactly what an ETF is to begin with before delving into more details regarding why Soros is so interested in adding to his position as of this most recent 13F filing season.
Simply put, an ETF is a managed basket of financial securities (usually stocks and/or bonds) that typically has a certain theme or correspondingly tracks a certain industry or sector in the process.
Let’s use the ETF in question in today’s analysis article, the iShares iBoxx Investment Grade Corporate Bond ETF as a sort of example.
Per the title, this ETF predominantly tracks and is filled with corporate bonds that are issued by, shockingly, major, well known corporations.
It is different from just a regular old stock in that the security you’re investing isn’t just one share of a company, but rather one share of a firm that manages holdings, on your behalf, of a portfolio of companies and their related securities, such as bonds in the case of this particular ETF.
Many are drawn to ETFs given their natural diversification, which is certainly a plus for the more common, passive investor looking to gain some exposure into the market but in a rather risk averse fashion.
Evidently, many would view the risk as being relatively low and adequately spread out since this ETF is managed by one of the most prominent asset management companies in the world, BlackRock.
As one might expect, BlackRock doesn’t manage this portfolio and in fact your money for free, as there are a few different fees that one should be aware of prior to considering an investment in any ETF.
Additionally, one of the benefits that should be noted regarding this ETF is that it currently shells out an annual dividend of $3.97, which to us is just a supplemental, fairly insignificant (when deciding whether or not one should think about ultimately investing in this ETF) perk that comes with being invested in this bond fund, but nevertheless still something to keep in mind as an informed investor.
Now that you’re a bit more familiar with ETFs, it’s only fair that we briefly discuss corporate bonds.
Let’s start with bonds themselves.
Bonds
A bond is considered a debt security that, in this case, a company would issue, usually sold at par value which is typically $1,000 (this figure isn’t especially pertinent to ETFs, but the more you know, the better), that said company pays periodic interest and full principal back at the end of the bond’s life, usually referred to as its maturity, or when the bond fully matures and in essence expires.
Why would a company do this?
Well, the main goal is raising money, usually to pay down some of its short-term debt(s) or other near-term liabilities or perhaps embark on a new promising project that requires some initial capital in the near future.
An example will certainly help.
Let’s suppose that renowned pharmaceutical company Gilead Sciences is looking to plant a new research facility in Elizabeth, New Jersey.
Instead of shelling out billions in cash all at once, it (in more cases than none) would probably make some sense to finance the development of the new facility through the debt markets (i.e., the bond market) by issuing bonds to the general investing public.
Each bond has different specifications, but let’s say Gilead has set this bond’s maturity for five years from the day it is issued.
If you opted to invest in the company’s bond today, it would be somewhat custom to expect to receive the original $1,000 you invested plus interest (whatever the rate Gilead sets, probably somewhere around 4%-8%) when the bond matures.
Sounds like a good deal if you’ve got some investable capital you don’t mind tying up for a few years. So what’s the catch?
The catch is if Gilead, for some reason or another, can’t afford to pay its bondholders back and it defaults on the debt (the bond, in this scenario) it issued.
While this is a very real possible outcome that prospective bondholders should consider, corporate bonds are just a few notches below that of United States Treasury bonds on the risk scale, from our vantage point. Specifically, a company as large, profitable, well established and well capitalized as Gilead Sciences isn’t likely going to have much of an issue paying back its investors after the aforementioned facility is developed and up and running.
All of this being said, it seems as though Soros is betting on the future success and, more specifically, the fulfillment of financial obligations of top-notch, large corporations in paying their bondholders in full.
Now that some of the basics regarding what an ETF is and what it is generally used for along with a brief overview of corporate bonds, let’s get a little more familiar with what is packaged in this specific corporate bond ETF.
LQD Holdings Breakdown
According to TD Ameritrade’s platform, 98.91% of the fund’s holdings are in corporate bonds with the rest of the pie split in small pieces of government bonds, convertible bonds and cash and cash equivalents.
Given the aforementioned information about this ETF, its vast majority concentration and focus in corporate bonds makes perfect sense.
Digging deeper, some of the corporate bond holdings within the iShares Corporate Bond ETF portfolio include Anheuser-Busch, CVS Health, Goldman Sachs, T-Mobile USA, Boeing, AT&T, AbbVie,, Bank of America, Microsoft, JPMorgan Chase, Amgen, Verizon, Cigna, Apple along with many, many other blue chip companies and various bond holdings thereof.
This is far from surprising as these are among some of the most well capitalized companies out there, which greatly implies that each will be able to pay back its bondholders in full or as previously specified in the terms of the originally outlined agreement.
Obviously, it is in iShares’ best interest to maintain a portfolio of companies with this exact characteristic.
The better capitalized, the better chance of repayment of its outstanding debt obligations (of course, including the bonds it has issued) which evidently has a direct correlation as to how well LQD performs in the intermediate and long runs.
Who is this ETF for?
Well, first and foremost, apparently George Soros and company.
While we’d love to email Soros himself and ask what his rationale is behind dedicating a substantial amount of his firm’s assets into this corporate bond ETF, we have a few ideas ourselves as to why he has an interest in said fund.
For starters, as the economy (in more respects than none) continues to contract as the Fed continues raising interest rates (or at least keep them at elevated levels), investors of all shapes and sizes are shifting to more conservative portfolios, as even during some of the worst of economic times the aforementioned companies have a high likelihood of not defaulting on their debt(s).
This is essentially what this ETF is filled with; quality companies with excellent track records as it relates to not defaulting on its debts and being run by sound financial stewards.
Putting all of this together, it seems as though Soros is becoming increasingly bearish on the US economy as a whole and has found a sort of safe haven in this seemingly low risk (although practically every investment has some sort of element of risk) bond ETF.
Should you buy LQD ETF?
Just because a billionaire investor has bought into it doesn’t necessarily mean other investors should follow suit.
Perhaps Soros is using the position as a hedge for a specific personal position he has in his portfolio or is employing some complex financial footing that lends a favorable tax outcome for his fund that we don’t know about.
Additionally, unlike generic equities (i.e., stocks) ETFs present a few nuances that investors must take heed of, including but certainly not limited to fees, how the fund is structured, the holdings within the fund, the track record and leadership of the fund and many other factors to consider before even getting close to seriously pondering putting some money behind one of these investment vehicles.
As it specifically relates to the ETF in question, we don’t think this is necessarily a bad place to be for those (admittedly, including ourselves) that are net bearish on the now and intermediate later of the United States and broader global economy.
All things considered, this ETF doesn’t seem like a bad idea given where the economy is and where it is heading.
We give the iShares iBoxx Investment Grade Corporate Bond ETF a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.