The U.S. Federal Reserve has committed to do whatever it takes to help the economy amid the growing coronavirus outbreak. In upholding that commitment, the Fed responded to the steep drop in corporate bond prices, with some trading well below their net asset values, or below what investors were willing to pay.
Under a new program called the Secondary Market Corporate Credit Facility, the central bank will go beyond buying U.S. Treasuries and for the first time ever begin buying investment-grade corporate debt in the form of Exchange-Traded Funds. However, the Fed's new purchasing agreement is not a buying spree, for the bank will be avoiding high yield ETFs like iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG). In addition, the Fed's outlines state that the central bank cannot own more than 20% of any one ETF or 10% of any individual corporate bond.
"It is unprecedented for the government of the United States to own the corporate debt obligations of the private enterprise in this country. This is new territory," Dave Nadig, chief investment officer and director of research at ETF Trends told CNBC. "Short term, of course, we know that this means buying pressure that'll bring up the price of the ETFs.
The central bank's new support tactic is aimed to assist households and businesses by creating a continuous flow of credit. The debt buying, coupled with the stimulus package signed into law on Friday that is meant to support the economy through the addition of about $500 billion for backing loans and support for companies, has brought a great time to invest in corporate debt ETFs.
Some popular corporate debt ETFs:
iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE: LQD)
BlackRock's (NYSE: BLK) ETF recorded a return of +14.7% for the week and provides exposure to a large range of investment grade corporate bonds.
Vanguard Intermediate-Term Corporate Bond Index Fund ETF (NASDAQ: VCIT)
Like iShares, Vanguard's corporate bond ETF also trades with a large range of investment grade corporate bond. This ETF had a return of +8.91% this week.
PIMCO Investment Grade Corporate Bond Index Exchange-Traded Fund (NYSE: CORP)
This ETF offers an even boarder range of corporate bonds across the bond sector and was up +11.59% for the week.
SPDR Portfolio Long Term Corporate Bond ETF (NYSE: SPLB)
State Street's (NYSE: STT) ETF offers a range of long-term bonds and was up +19.29% this week.
iShares Long-Term Corporate Bond ETF (NYSE: IGLB)
BlackRock's version of a long-term corporate bond ETF was up +19.69% this week.