AGG - IUSB: It Might Be Time Finally

2023-10-30 15:20:48 ET

Summary

• iShares Core Total USD Bond Market ETF is worth considering as stocks become more volatile and bonds are catching a bid.
• The IUSB ETF provides broad access to the total U.S. Dollar-denominated bond market with a low expense ratio and a 5.22% yield.
• The fund's diversified holdings and focus on AAA-rated securities make it an enticing option for investors seeking income potential and risk management.

I have a trend of my own. - Andrei Platonov.

You're supposed to buy when no one else wants to.

Let me say that again.

You're supposed to buy when no one wants to.

We just went through the greatest bond market crash in history.

That sounds bullish.

And that's why the iShares Core Total USD Bond Market ETF ( IUSB ) now is worth a consideration.

As stocks become more volatile, bonds are finally catching a bid, making this exchange-traded fund ("ETF") a viable allocation worth considering.

IUSB: An Overview

IUSB provides an investor with broad access to the total U.S. Dollar-denominated bond market. Striving to replicate the investment results of the Bloomberg U.S. Universal Index, IUSB includes U.S. dollar-denominated, fixed-rate, taxable bonds across the entire credit spectrum with at least one year until maturity. The fund's assets are primarily composed of U.S. Treasuries, agency mortgage-backed securities, and corporate bonds, including a small allocation to high-yield debt.

IUSB was launched by investment management giant BlackRock (BLK) on June 10, 2014. The fund had amassed net assets of approximately $21 billion, making it a substantial player in the ETF space. Its expense ratio, a measure of what it costs an investment company to operate a fund, stands at a low 0.06%. An expense ratio is important because lower expenses allow the fund's assets to grow faster. The fund's 30-day SEC yield, a standard measure of a bond fund's income-generating potential, is currently 5.22%.

Nothing wrong with that.

IUSB's Holdings

The fund’s portfolio is diversified across multiple sectors and credit ratings. A little over a third of the fund is in Treasuries. Most of the corporate credit risk debt has a small allocation to the overall portfolio.

The fund’s credit quality ratings, sourced from S&P, Moody’s, and Fitch, indicate a strong focus on AAA-rated securities, which are either explicitly or implicitly backed by the full faith and credit of the U.S. Federal Government. This suggests that the credit risk of these securities is virtually non-existent. This is important if I'm right about Phase 2 of the credit event which hurts corporate bonds the most.

Peer Comparison

While many investors consider the Bloomberg Aggregate Bond Index and its equivalent ETF ( AGG ) as representative of the total U.S. bond market, it only tracks the investment-grade portion. By contrast, IUSB, which tracks the Bloomberg Universal Bond Index, includes both investment-grade and high-yield bonds, providing an exposure similar to the average core bond mutual fund but at a lower cost.

That minimal amount of exposure to high yield helped at the margin, as ISUB outperformed AGG since late 2020. I suspect it might be a drag relatively going forward, but not in a huge way given the still overwhelming weighting towards Treasuries.

Given the fund's weighted average maturity of 8.14 years and an effective duration of 5.72 years, there's a moderate sensitivity to interest rate changes. In other words, it won't have the same oomph as long duration Treasuries in a risk-off sequence, but still can move.

Is IUSB the Right Investment for You?

Investing in IUSB could be a strategic move for investors seeking broad, low-cost exposure to the U.S. dollar-denominated bond market. Its diversified holdings across various credit ratings and sectors and its focus on AAA-rated securities offer an enticing blend of income potential and risk management.

This is a good fund, and the time might be right to finally catch the falling knife in high quality bond funds.

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