SPSB Vs. SPLB: Comparing Short/Long Corporate Bond ETFs

(This article was co-produced with Hoya Capital Real Estate)

Introduction

This is the third in my series of comparing various types of bond ETFs. The first compared Short and Long maturity High-Yield Corporate Bond ETFs; the second the same for a pair of US Treasury ETFs. Here I look at bonds, credit-risk wise, that fall between those two extremes, Investment-Grade Corporates. Both iShares and SPDR have a Short, Intermediate, and Long maturity ETF. I chose the SPDR set because their short-end ETF was only 1-3 year focused versus 1-5 for the SPDR short-end one. This means this article will review the following ETFs and their respective indices:

• SPDR Portfolio Short Term Corporate Bond ETF (NYSEARCA:SPSB)
• SPDR Portfolio Long Term Corporate Bond ETF (NYSEARCA:SPLB)

This is the most up-to-date yield curves I could find; from the end of March.

While I didn’t find recent curves, I did find current rates across Governments and multiple Corporate bond ratings across time periods.

The long-end of the curves are up 50-100bps, the short-end not so much from what I can tell. To me, flat yield curves point to owning shorter-duration ETFs like SPSB. This article will try to confirm that thought.

SPDR Portfolio Short Term Corporate Bond ETF review

Seeking Alpha describes this ETF as:

The SPDR Portfolio Short Term Corporate Bond ETF invests in U.S. dollar denominated fixed rate and non-convertible investment grade corporate bonds which have a remaining maturity of greater than or equal to 1 year and less than 3 years and that are rated Baa3 or higher by Moody’s or BBB- or higher by S&P or Fitch. The fund seeks to track the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. SPSB started in 2009.

Source: seekingalpha.com SPSB

SPSB has $7.5b in AUM and shows a TTM yield of 1.36%, with a Forward yield close to 2%. The fees are 4bps.

Index review

For index-based ETFs, studying the index is important. Bloomberg provides this data on their index.

The Bloomberg US Corporate 1-3 Yr Index measures the investment grade, fixed-rate, taxable corporate bond market with 1-3 year maturities. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Minimize size is $300 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars, fixed rate and nonconvertible. Rebalanced on the last business day of the month.

Source: bloomberg.com LF99TRUU:IND

SPSB holdings review

The sector allocations show SPSB has similar exposure to Financial and Industrial bonds, which dominate the portfolio.

While almost 100% in investment-grade bonds, most are in the lower IG ratings.

Morningstar gives this portfolio an overall rating of A-. They say the WAM is 2.04 years.

With over 47% of the portfolio maturing within two years, SPSB is in good shape to capture the current trend of rising interest rates. The WAC through 2023 is 2.8% and we see above that new debt in the ratings/maturity this ETF uses are around 5%.

Top holdings

With almost 1200 bonds, the above list is only 8% of the portfolio. That and investing in IG bonds should result in no or very little default damage even if the US economy goes into a deeper recession.

SPSB distribution review

Being a short duration ETF, the yield closely correlates to the movement in interest rates and the payouts have been climbing since the FOMC started raising the Fed Funds Rate. Recently, Chairman Powell threw cold water on the idea that the Fed would “ease up”, so expect the monthly distribution to continue increasing. While looking better, such a payout pattern doesn’t score well in the Seeking Alpha dividend model, resulting in a poor “D” overall grade.

SPDR Portfolio Long Term Corporate Bond ETF review

Seeking Alpha describes this ETF as:

The SPDR Portfolio Long Term Corporate Bond ETF invests in the fixed income markets of the United States by owning USD denominated taxable, fixed-rate, investment grade corporate bonds with a maturity of greater than or equal to 10 years. The fund seeks to replicate the performance of the Bloomberg Barclays U.S. Long Term Corporate Bond Index. SPLB started in 2009.

Source: seekingalpha.com SPLB

SPLB has $646m in AUM, with a TTM yield of 4% and Forward yield of 4.25%. Fees are 4bps.

Index review

Here, Bloomberg provides this description:

The index is designed to measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. The Index is a component of the Bloomberg U.S. Corporate Index and includes investment grade, fixed-rate, taxable, U.S. dollar-denominated debt with $300 million or more of par amount outstanding, issued by U.S. and non-U.S. industrial, utility, and financial institutions. Rebalanced on the last business day of the month.

Source: etfdb.com/index/bloomberg

SPLB holdings review

Unlike SPSB with its even distribution, SPLB is skewed toward Industrial bonds and has a good weighting in Utilities, whereas SPSB has under half this weighting.

SPLB also earns a A- rating from Morningstar for its portfolio.

Naturally the maturity schedule differs as the focus here is long-term debt over 10 years in length. The WAM, at over 23 years, is 11X that of SPSB, making this the better choice once rates have peaked.

SPLB is not in an easy position to move its WAC up as almost no bonds mature in the near future. Growth in AUM would help.

Top holdings

With over 2800 bonds, the Top 20 are just under 5% of the portfolio. For neither ETF did I find data that would tell us who the major issuers are.

SPLB distribution review

One advantage/disadvantage for SPLB compared to SPSB is the duration/maturity differences. SPLB, with its longer duration will have smoother changes in its payout level and most times provides a higher yield. Those facts help explain their slightly better “C” grade.

Compare ETFs

With their Short versus Long duration/maturity strategies, the following results would be expected.

The next set of data points compares returns and risk results. As above, the results are what I would expect.

With rates in a downward trend until this year, being Long was the place to be in the bond market. As the chart shows, the changeover in strategy started as investors feared the FOMC would tighten. For investors looking for a fund to use in place of fixed-term CDs, SPSB would be a ETF to consider though its CAGR has trailed inflation during the above time period, but still better than what rolling CDs returned would be my guess.

Portfolio strategy

These ETFs are geared toward investors that want USD denominated debt but need more income than AAA-rated US Treasuries offer but less risk than what a High-Yield ETF might contain. SPDR alone offers ten US Corporate Bond ETFs covering almost any duration/risk combination an investor would want. About the only one I did not see is a total maturity and risk ETF. For that, you would need to combine the SPDR Portfolio Corporate Bond ETF (SPBO) and the SPDR Portfolio High Yield Bond ETF (SPHY). The advantage of all these choices is the investor gets to set the maturity/risk combination to what they desire and/or need to balance out their entire portfolio. These eight have 10 years’ worth of results.

Final thoughts

Until the Fed starts to indicate the interest rate top is near, using a short-duration ETF like SPSB is the safer option, though the investor’s income is half what SPLB currently offers.

Here are links to the prior two articles in this series, plus a related one: