Investing in Corporate Bonds? One of These ETFs Holds Up Better Long-Term.

The State Street SPDR Portfolio Long Term Corporate Bond ETF (NYSEMKT:SPLB) stands out for its ultra-low fees and higher yield, while the iShares iBoxx Investment Grade Corporate Bond ETF (NYSEMKT:LQD) is larger and has held up better during tough bond markets.

Both SPLB and LQD target U.S. investment-grade corporate bonds, making them core options for fixed income exposure. The main difference: SPLB zeroes in on long-term maturities (10 years or longer), while LQD covers the full investment-grade maturity spectrum.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

SPLB looks more affordable with a 0.04% expense ratio, undercutting LQD’s 0.14% fee, and it also delivers a higher yield, which may appeal to income-focused investors seeking a bigger payout from their bond allocation.

Performance & risk comparison

What's inside

SPLB tracks investment-grade, U.S. corporate bonds with maturities of 10 years or more, resulting in a portfolio of 2,953 holdings and a fund life of 16.8 years. Its top positions include Meta Platforms (NASDAQ:META) Sr Unsecured 11/65 5.75 0.39%, Anheuser Busch InBev (NYSE:BUD) Company Guar 02/46 4.9 0.38%, and CVS Health (NYSE:CVS) Sr Unsecured 03/48 5.05 0.33%. The fund’s long duration makes it more sensitive to interest rate movements, which helps explain its higher yield, but also its deeper drawdown in recent years.

LQD also holds only investment-grade corporate bonds but spans all maturities, with 3,002 holdings. Its largest positions are BlackRock (NYSE:BLK) Cash Fund Treasury SL Agency 0.90%, Anheuser Busch InBev 0.23%, and CVS Health 0.20%. This broader approach has helped LQD weather recent volatility better than SPLB, particularly during periods of rising rates.

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What this means for investors

Corporate bonds are debt securities that companies sell in exchange for cash, basically a sort of IOU. In exchange, investors get interest payments and the face value of the bonds when the bond term ends, known as maturity. Generally speaking, bonds can be strong investments for investors looking for predictable income and portfolio diversification, and corporate bonds can carry higher yields than government bonds, making them more attractive candidates within the asset class.

The LQD and SPLB ETFs, which hold large portfolios of corporate bonds and sell them as a package to retail investors, are pretty similar when it comes to the number of holdings and some of their top positions. One major difference between the two funds is that LQD doesn't limit its holdings by maturity. In fact, 22.3% of its holdings have maturities between three and five years, and 16.6% are between five and seven years. SPLB eliminates these bonds, holding only bonds with maturities of 10 years or more.

LQD's broader range is likely the reason for its slightly better long-term performance and lower beta, which indicates less market volatility. On the other hand, SPLB offers a much lower expense ratio as well as a higher dividend yield.

Glossary

Expense ratio: The annual fee charged by a fund, expressed as a percentage of assets, to cover operating costs.
Dividend yield: The annual income from dividends as a percentage of the fund's price.
Investment-grade: Bonds rated as relatively low risk of default by major credit rating agencies.
Corporate bond: A debt security issued by a corporation to raise capital, paying interest to investors.
Maturity: The date when a bond's principal is repaid to investors and interest payments stop.
Drawdown: The decline from a fund's peak value to its lowest point over a specific period.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Beta: A measure of a fund's volatility compared to the overall market, often the S&P 500.
AUM (Assets Under Management): The total market value of assets managed by a fund.
Duration: A measure of a bond's sensitivity to interest rate changes; longer duration means higher sensitivity.
Holdings: The individual securities or assets owned by a fund.

Sarah Sidlow has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool recommends BlackRock and CVS Health. The Motley Fool has a disclosure policy.