Be Selective When it Comes to Corporate Credit
October 18, 2021
Read Time 2 MIN
Investment grade corporate bonds can increase the overall yield of a core bond portfolio, without having to go too far down the credit spectrum. However today’s low rate and tight credit spread environment may have some investment grade bond investors taking on more risk than usual, unnecessarily. The U.S. corporate bond market is vast and being selective may allow investors to achieve better outcomes. We believe that by focusing on bonds that are attractively valued relative to their embedded risks, investors may not need to sacrifice income or assume additional risk without adequate compensation.
Investment Grade Edge, Driven by the Industry’s Leading Credit Model1
Accurately assessing a bond’s fair value is key. While credit ratings can be an important source for determining the creditworthiness of a bond, there are many other factors investors should pay attention to. We believe that a forward-looking outlook based on market-based inputs such as a firm’s stock price can allow investors to identify bonds with attractive income and upside potential, while avoiding bonds that do not provide adequate compensation or may be at a high risk of being downgraded to high yield.
VanEck Moody’s Analytics® IG Corporate Bond ETF (MIG) and VanEck Moody’s Analytics® BBB Corporate Bond ETF (MBBB) focus on attractively valued bonds while seeking to control credit risk.
MIG and MBBB track indices based on credit metrics calculated by Moody’s Analytics’ CreditEdge® platform, which drives credit risk management at over 650 of the world’s largest institutions. The strategy targets the most attractively valued corporate bonds relative to their “Expected Default Frequency™”2 and seeks to provide investors with upside return potential while controlling for credit risk.
A Quant-Driven Approach to Investment Grade Bonds
- Moody’s Analytics’ industry-leading credit model is supported by decades of experience, an expansive dataset and a team of 30 dedicated researchers.
- There is significant dispersion of credit risk pricing within the corporate bond market. This provides an ability to build diversified portfolios with alpha potential, without taking excessive risk.
- By quantifying embedded risks and capturing market pricing opportunities, these strategies allow investors to focus on investment grade bonds offering attractive relative value while avoiding potential “value traps.”
Bonds that are attractively valued relative to their fair value have historically outperformed overvalued bonds.
1 Source: Moody’s Analytics based on various industry awards including Risk Technology Awards 2020 Winner (Best credit data provider, Best wholesale credit modelling software), Risk Technology Awards 2019 Winner (Best credit data provider, Best wholesale credit modelling software), and Data Management Awards 2018 Winner (Best risk data aggregation platform).
2 Expected Default Frequency™ is a proprietary credit risk metric developed by Moody’s Analytics, Inc. that measures the probability that a firm will default over a specified period of time.
An investment in the VanEck Moody’s Analytics IG Corporate Bond ETF (MIG) and VanEck Moody’s Analytics BBB Corporate Bond ETF (MBBB ) may be subject to risks which include, among others, investing in European issuers, foreign securities, foreign currency, BBB-rated bond, credit, interest rate, liquidity, restricted securities, consumer staples sector, financials sector, energy sector, communication services sector, market, operational, high portfolio turnover, call, sampling, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, data, non-diversified, concentration and trading, premium/discount and liquidity of fund shares risks. The Funds’ assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
The Adviser has entered into a licensing agreement with Moody's Analytics to use certain Moody's Analytics credit risk models, data and trademarks. Moody’s Analytics® is a registered trademark of Moody’s Analytics, Inc. and/or its affiliates and is used under license.
The Fund is not sponsored, promoted, sold or supported in any manner by Moody’s Analytics nor does Moody’s Analytics offer any express or implicit guarantee or assurance either with regard to the results of using the Moody’s Analytics trademark or data at any time or in any other respect. Moody’s Analytics has no obligation to point out errors in the data to third parties including but not limited to investors and/or financial intermediaries of the Fund. The licensing of data or the Moody’s Analytics trademark for the purpose of use in connection with the Fund does not constitutes a recommendation by Moody’s Analytics to invest capital in the Fund nor does it in any way represent an assurance or opinion of Moody’s Analytics with regard to any investment in this financial instrument. Moody’s Analytics bears no liability with respect to the Fund or any security.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 888.460.6805 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
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June 23, 2022
With higher relative yields, a history of strong risk-adjusted returns, and protection against rising rates, we believe this is a great time to make a strategic allocation to CLOs.