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Corporate - Investment Grade ETFs
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About Corporate - Investment Grade ETFs |
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Corporate Investment Grade ETFs Overview and forecast
The term Corporate Investment Grade refers to high quality corporate instruments of debt, and other securities. These are rated securities, and they're a cut above others. There's only one ETF categorized in the Corporate Investment Grade ETFs group, but that's a little misleading. Other ETFs do work in this field, but it's not their exclusive role. Other financial entities also operate using this class of security, notably Citigroup, post- bailout, which used its TARP money to buy a lot of very good quality securities.
The lone representative of the ETFs in this investment field is Rivus Bond Fund (BDF). A look at the chart shows among other things that this ETF took a very much lower hit in the meltdown than other ETFs. The net 10.93% 12 month loss on prices is trivial, compared to the massive markdowns in other ETFs over the 2008- 2009 horror stretch.
This is an interesting study, and if you're not familiar with this class of security in which Rivus Bond Fund (BDF) trades, it's a good example. Corporate Investment Grade securities are operated in the strictly textbook way that debt and other instruments are supposed to be operated. The quality of the security is checked, and its value analyzed, and at this point the security is rated by someone like Moodys or Standard and Poor. There are four grades of rating, and BDF operates exclusively with the highest rated securities.
That's turned out to be a good move, obviously, for BDF. Quality of holdings in securities was the Achilles heel of the banks and financial houses, and it destroyed some of them. Other ETFs do acquire these securities, but their models also include what are called below investment grade securities, and their strategies are wider ranging.
It's likely that the crash will have one lingering effect, and that will be a much tougher approach both by regulators and the market itself to corporate instruments. This massive blow to the markets has also been mass aversion therapy to high risk securities. The shock which the market has received and had to absorb the fact that many of these instruments were severely deficient has both demanded and created new rules. It's quite likely that the ETFs, particularly the majors, will move upmarket, and away from the less reliable un- graded forms. As a model, particularly in the interests of attracting big capital, it's a good strategic approach, as well as a good selling point.
Short term (6 months)
BDF has turned around its shallow dip in the first half of 2009. This ETF trades in a relatively shallow volume range, and it's not part of the better known families of ETFs on the market. It's not too representative of the other ETFs which also operate in this field, like the Corporate High Yield ETFs, which have had their own problems, but it does indicate that the markets are looking hard at how these ETFs work, and what they're working with. The markets are, obviously, making a distinction between qualities of securities. The Corporate High Yield ETFs were severely downgraded, and their returns have been dubious, in terms of value, with modest results from a low base.
BDF, however, has managed to get itself back into the black from a comparatively higher base, and has a low level of loss even since inception, which is quite unusual for most ETFs. The short term could be quite good for BDF, because it may actually be ahead of its competitors, in terms of strategy.
Medium term (2 years)
The likelihood of ETFs in corporate investment doing some major reworking of both structures and management is practically inevitable. In general, their performance has been as bad as the markets, and investor patience with average returns is long gone. Even if the other ETFs don't sign up to become exclusively dealers in high quality rated securities, they're more than likely going to revamp stale portfolios and go for better and more reliable earners, both in the interests of better returns and better market image.
The mystique of this class of investment has been largely obliterated. Investors are wary of quality issues, and are looking for much stronger returns than the basic corporate securities models have been providing. BDF is perhaps the forerunner of a very much more competitive market in this area. In the medium term, its volumes and returns are OK, but not compelling. A probable scenario would be building on a proven strategy, and more capitalization in the medium term.
Long term (5 years)
In the long term, the corporate sector is going to generate a lot more debt and other securities, in the course of financing getting back on track. It is more than probable that both corporations and buyers of instruments will want quality. The markets will distrust anything which resembles junk bonds in this field, and it's probable that regulation will tighten up the whole range of investments.
As these new securities come on the market, investors won't be slow to see the benefits of good quality, properly valued, securities of this type, particularly in comparison to the appalling rubbish of the past. Good corporate securities, ironically, could be reborn as an excellent type of investment, as a result. That in turn will mean that prices for those materials will improve, too. BDF won't be the sole member of the Corporate Investment Grade ETFs for long.
Qualifiers to projections
There's another factor which has to be considered: The return of global capital into the investment markets. That could be great for good quality Corporate Investment Grade investors, but the risk of overheating remains, as seen during the frenzy of the housing boom in the US, and the production of hopelessly valued securities which never received enough scrutiny. Markets do get saturated, and the story of all derivatives is that when that happens the wheels fall off.
These projections are based on the proper investment approach. Corporate Investment Grade securities are the classic instance, literally the teaching method, for how corporate debt and other instruments are supposed to be operated. Whether or not the bulls have learned when to avoid the gate is yet to be proven. Investors should familiarize themselves with the entire process of corporate investment gradings, and remember that free lunches are few and far between, when planning their moves.
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Last Updated on: 2010-01-14 02:03:40 |
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