Why We don't Buy Corporate Bond ETFs
Corporate bond ETFs don't work for our clients. Large price discounts and premiums to net asset value (NAV) tend to occur when we are trading. These deviations from NAV can add unnecessary trading cost to portfolios. Accordingly, we're believers in traditional corporate bond mutual funds that trade at NAV at the end of the day.
The size of the ETF NAV/MktPx discounts that Ferri demonstrates were actually surprising to me. I've been generally pretty happy with the performance of LQD (the iShares iBoxx $ Investment Grade Corporate Bond ETF) - transparency of holdings, a good index, very low costs, plenty of liquidity in the ETF. As liquid as the holdings in LQD are, the discount it displayed was surprising, though not surprisingly, a lot smaller than the corresponding spread for the high-yield ETF, HYG.
I'd be very interested to see how Vanguard's unique ETF-as-a-share-class affects this. Vanguard's got both open-end shares as well as ETF shares of their Intermediate-Term Corporate Bond Index - VCIT and the institutional share open-ended class shares VICBX (theoretically the min. invst is $5million, but there may be ways around that).
Morningstar suggests that VCIT, LQD, CFT and CORP are all direct competitors. LQD is by very far the largest and most liquid, at over $16billion in assets. VCIT (and the corresponding institutional shares all together) has about $0.9billion, CFT has about a billion and CORP, by far the smallest of the group, is only about $75million.
Anyway, Ferri's article is well worth the read.
There may be some closed-end funds worth looking at in this area, too, since CEFs have the advantage of not having to create or redeem shares, they don't get hit by liquidity/trading issues the same way open-ended or ETFs might. On the flip side, though, CEFs often have (a) high management fees; (b) leverage; and (c) discounts/premiums to NAV are sometimes erratic, though (c) may also present some opportunities when discounts are wider than usual for a given CEF. I generally stay away from CEFs due to (a) and (b) (and general aversion to actively managed funds in the first place).
David S. Meyers, CFP(R)