2024-01-08 08:06:45 ET
Summary
- iShares Core Total USD Bond Market ETF offers exposure to the entire bond market, including junk bonds.
- IUSB has a similar performance to the largest "total" bond market ETF, BND, with a slight outperformance over the past 5 years.
- IUSB is a suitable choice for passive investors who prefer to buy and hold a broad market bond index.
- I rate IUSB a Buy.
iShares Core Total USD Bond Market ETF (IUSB) is an interesting ETF that could play nicely into certain investors' portfolios. IUSB is different from other total bond market funds like BND and AGG . While both of these bond ETFs are marketed as total bond market ETFs, they do leave out one sector of the bond market. Neither BND nor AGG offers any exposure to the junk bond market. IUSB offers exposure to the entire bond market, including junk bonds. For investors who don't try to time the market and prefer to buy and hold total market index funds, this ETF is a great choice for the fixed-income component of their portfolios. I rate IUSB a Buy.
Holdings
IUSB holds a total of 15,209 bonds. As mentioned before, the feature that makes IUSB unique is it holds non-investment grade bonds along with investment grade. Let's take a look at the credit quality of IUSB's holdings.
The vast majority of this ETF is in AA-rated bonds, most of which are US treasuries. Only about 6.4% of the ETF is invested in junk bonds (BB and lower). That means the difference between IUSB and BND, AGG, or another "total" bond market ETF is very little. Even the average maturities are very similar. IUSB's average maturity is 8.33 years while BND's is 8.7 years, less than a 0.4 difference. The final metric to compare is the 30-day SEC yield. IUSB's 30-day SEC yield is 4.49% while BND's is 4.31%. The slight increase is due to IUSB's small holdings of riskier non-investment grade bonds that tend to have a higher yield than their investment grade counterparts.
IUSB vs. Peers
I'll be comparing IUSB to BND, as BND is the largest "total" bond market ETF. Let's start by comparing returns. The chart below shows the total return of IUSB and BND over the last 5 years.
Both ETFs have had very similar performance. Over the past 5 years, IUSB has outperformed BND by about 1.50%. IUSB tends to be more volatile because of its higher-risk investments. As mentioned before, only about 6.4% of IUSB is in junk bonds, so it is a very small difference between the two ETFs.
Who should buy IUSB?
I think IUSB is mainly for passive investors. IUSB can be a great choice for investors who don't try to time the market, plan on buying and holding, and can tolerate slightly higher risk. Most passive investors typically believe that it's very hard to time the market so they prefer to just own a broad market index, in this case, a bond market index.
John Bogle, the late founder of Vanguard, argued in his book The Little Book of Common Sense Investing that it's nearly impossible to outperform the equity market. A short section of the book discusses the bond market. He argues the same philosophy that owning a broad market bond ETF would offer better results than an actively managed bond ETF because no one is smarter than the market and that all bond prices are at equilibrium, and it's nearly impossible to know if the prices will go up or down. He doesn't directly discuss non-investment grade bonds, but with his philosophy in mind, it makes sense to assume that the prices of junk bonds are at equilibrium and that it's any investor's guess whether they will go up or down. So if you can tolerate the risk, this ETF is great for investors who follow Bogle's philosophy and invest in indexes.
My performance forecast
While I have a lot of respect for John Bogle and do think there is a lot of truth to his philosophy, I still take my shot at accurately forecasting market performance. With that said, I think IUSB is the perfect ETF for people who submit to the Bogle philosophy, but there is one issue I have with IUSB in the short run. Let me start by saying I have Strong Buys on both BND and AGG. I think that rates are likely to continue to go down, and the bond market will have a green 2024. If you're interested in my full reasoning for the Strong Buy, you can read it here . My issue with IUSB is that it holds junk bonds, which I am very bearish on right now. I won't go into too much detail on why I'm so bearish because if you are buying IUSB to submit to the Bogle philosophy, all my reasoning doesn't matter. I believe junk bonds are in a poor position for two reasons. First, junk bonds are overpriced. Due to higher interest rates, the issuance of junk bonds by companies has slowed down. This has led to a shrinking supply, causing artificially high junk bond prices. The second reason for being bearish on junk bonds is the looming maturity wall. Massive amounts of debt were issued during the Covid era because rates were so low. A large amount of that debt is set to mature between 2024 and 2026. This leads to companies having to refinance at a much higher rate. If you want a deep look into my perspective of the junk bond market, you can find it here .
Although I'm very bearish on the junk bond market right now, junk bonds make up an extremely small percentage of IUSB. Even in the worst imaginable scenario, an extreme crash in the junk bond market, the maximum potential fall of IUSB due to junk bonds is 6.4%. And this assumes that the junk bond market falls to 0 which is for all practical reasons impossible. So while I'm not bullish on 6.4% of its holdings, it's unlikely to severely cut into its gains.
Takeaways
If you want exposure to the entire bond market, IUSB is a great ETF for you. IUSB offers exposure to every sector of the public bond market, including junk bonds, treasuries, and corporate bonds. IUSB is a great bond ETF to buy and hold for the long run. Index investors especially should like this ETF because it's a true total bond market ETF. I rate IUSB a Buy.
For further details see:
IUSB: A True Total Bond Market Index ETF