Nearly $29 billion sits in a fund with negative returns over the past five years.
The fund is LQD, the oldest and largest investment grade corporate bond ETF in the world.
It’s run by BlackRock, and holds over 3,000 bonds issued by companies like JPMorgan, Bank of America and CVS.
This is the conservative end of the conservative end.
It’s 5 year annualized total return: -0.11%.
Over that same stretch, short term Treasury bills returned about 3.5% a year.
So on a $300,000 allocation, the fund underperforms cash by $58,000.
Meaning the largest corporate bond fund is the world is straight garbage.
Now, the reason most people never notice is that LQD advertises a 30-day SEC yield of 5.15%.
But while yield is what the fund collects in interest... total return is what you actually end up with after the price of the bonds moves.
In 2022 LQD lost 17.93% as the Fed raised rates, and it fell nearly 25% from its high in October of that year.
It has still not made that back.
Here is the part very few people understand about these ETFs…
If you buy an actual corporate bond, you get a maturity date.
Buy a 10 year Ford bond… hold it for 10 years… Ford pays you back at face value, and everything that happened to the price in between was just noise you got to ignore. That maturity date is the entire reason bonds feel safe.
But a bond ETF has no maturity date.
It’s a rolling pool that sells bonds as they get short and buys new long ones to replace them, forever.
Then you have the issue that LQD tracks an index that weights bonds by market value. Which means the more debt a company has issued, the larger your position in it.
Roughly half the fund sits in BBB rated paper, the bottom rung of investment grade, one downgrade away from junk.
So you’re not lending most heavily to the strongest borrowers. You are lending most heavily to the biggest borrowers.
And that’s a real issue when the product gets sold as safety… when what it actually delivers is unhedged interest rate exposure with a coupon attached.
So if you hold corporate bond ETFs as a broad market hedge… it might be time to reconsider…
Maybe I’ll write a book on some of better options out there - would you read it?
Oliver