SPLB - SPLB: A Good Fund But Not A Good Time

2023-10-24 17:15:59 ET

Summary

• Investing in the SPDR® Portfolio Long Term Corporate Bond ETF may not be worth the risk due to potential default risk in the global corporate credit market.
• SPLB is a low-cost ETF that provides exposure to U.S. corporate bonds with a maturity of 10 years or more.
• SPLB's credit quality is largely investment grade, but it still carries some credit risk and may be vulnerable to widening credit spreads.

A promise made is a debt unpaid. - Robert W. Service.

Investing in the bond market can be a strategic move for those looking to diversify their portfolios and potentially earn steady income, especially given the rise in yields here. But credit quality matters, and I broadly worry that we are on the edge of a global corporate credit event where investors suddenly realize that there is default risk following the fastest rate hike cycle in history. There are some good funds that track quality corporate bonds, and the SPDR® Portfolio Long Term Corporate Bond ETF ( SPLB ) is one of them - I just don't think the risk is worth an allocation here just yet.

What is the SPDR® Portfolio Long Term Corporate Bond ETF?

SPLB is an exchange-traded fund ("ETF") that seeks to provide investment results corresponding generally to the price and yield performance of the Bloomberg Long U.S. Corporate Index. This ETF is part of the low-cost core SPDR Portfolio ETFs, which are designed to offer broad, diversified exposure to core asset classes. Investors should note that SPLB is a low-cost ETF that seeks to provide comprehensive exposure to U.S. corporate bonds with a maturity of 10 years or more. The Index includes investment-grade, fixed-rate, taxable, U.S. dollar-denominated debt with $300 million of par outstanding.

SPLB holds over 2,800 positions with an average maturity of around 23 years and an average yield of 6.51%. The fund's holdings are heavily skewed towards industrial, financial, and utility sectors, accounting for the lion's share of the fund's portfolio.

Credit Quality of the Fund's Holdings

The credit quality of the fund's holdings is largely investment grade, with the majority of bonds rated below Single-A. This means that while the fund takes on some credit risk, it is relatively low compared to high-yield bond funds. Still, it does have credit risk, although it's clearly more isolated from a debt issuer balance sheet perspective.

Performance

The performance of SPLB has been impacted by changes in interest rates, inflation, and other economic conditions. The duration of around 12 years has clearly hurt the fund given the devastation across the board in fixed income over the last two years.

This has largely been a duration selloff. The SPLB fund has fared far better than Treasuries despite having some credit risk. If I'm right that we are in a credit event, and spreads widen, this could remain in a downtrend as yields rise, reflecting corporate default risk repricing.

Comparison with Peer ETFs

When considering investing in SPLB, it's important to compare it with other similar ETFs in the market. For instance, the iShares 10+ Year Investment Grade Corporate Bond ETF ( IGLB ) and the Vanguard Long-Term Corporate Bond Index Fund ETF Shares ( VCLT ) are two other long-term corporate bond ETFs that investors might consider. Net of fees, these funds have all had similar performance tracking this part of the bond market, so it doesn't appear that SPLB has any noticeable differentiators by comparison.

Conclusion

Like any investment, investing in SPDR® Portfolio Long Term Corporate Bond ETF comes with its own set of risks. These include interest rate risk, issuer default risk, issuer credit risk, liquidity risk, and inflation risk. The main one to focus on now, in my view, is credit risk. While clearly not as vulnerable as funds that have lower quality bond market focus, this could still be vulnerable should credit spreads widen. SPDR® Portfolio Long Term Corporate Bond ETF is a good fund for what it tracks, I just would rather wait for a dislocation in corporate credit.

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