IGSB: Stale Prospects As Risk Premiums Are Unfavorable (NASDAQ:IGSB)

Despite its best-in-class allocation, IGSB is facing an uphill battle as short-term corporate bond premiums remain adrift. Read more on the ETF here.

IGSB: Stale Prospects As Risk Premiums Are Unfavorable (NASDAQ:IGSB)

ozgurdonmaz Rising interest rates prompted many retail investors to believe that the bond market would be lucrative in 2022. However, things have turned out to be quite the opposite, as both bonds and equities have faltered. Keep in mind that the retail investor base only makes up a small portion of financial market liquidity.

Thus, it's critical to understand institutional portfolio managers' thought processes. Today's article covers the iShares Short-Term Corporate Bond ETF (NASDAQ:IGSB). We assessed various risk premiums and concluded that short-term corporate bonds remain a risky bet; therefore, we placed a hold rating on this ETF.

Here are a few things to consider going into 2023. Credit Spreads, Volatility, Unstable FX Market Rising interest rates often add appeal to the bond market as it provides investors with higher compensation and erodes expected inflation. However, 2022's rising interest rates were set in motion due to unhealthy inflation instead of a means to cool a flourishing economy.

Therefore, many investors interpreted the yield curve as bearish. As such, the broader financial markets suffered from risk aversion. Data by YCharts As things stand, there are various concerns relating to the corporate bond space.

For example, credit spreads remain elevated, the inflation rate and its uncertainty are an issue, foreign exchange markets are volatile, and company earnings yields are starting to flatline. Credit Spreads (MacroMicro) S&P 500 Fwd Earnings (Yardeni Research) Lastly, the VIX (VIX) isn't receding to pre-pandemic levels. Despite the VIX being relatively tame in comparison to its levels in 2020 and 2021, it remains of concern.

Investor uncertainty indicates that the market thinks economic variables are non-stationary. Data by YCharts Does The Risk Premium Make Sense? Intuitively a rise in the market premium during times of high uncertainty would drive investors into the bond market. However, this ETF's decline conveys that it certainly hasn't been the case.

We believe investors reckoned better risk-return utility in cash than in corporate bonds or equities, as expected returns weren't enough to compensate for the additional units of risk. Equity Risk Premiums & YTM (market-risk-premia.com) Furthermore, short-term yields are elevated as monetary policy has exhibited a significant influence on short-term yields. From an investor's perspective, this might be lucrative.

However, we think that widening credit spreads and significant inflation uncertainty have phased out many of the benefits. Bond Yields (Bloomberg ) Going into 2023, we anticipate much of the same for this ETF. Pressure will be added to the ETF for as long as inflation remains uncertain, and elevated credit spreads certainly aren't helping.

We remain bearish on corporate bond indicators until more monetary policy clarity appears. Assessing The ETF's Allocation, and Distribution Firstly, a holistic overview of the ETF's portfolio indicates that its Effective Duration is elevated, which means it's highly sensitive to interest rate shifts. As such, the ETF could be vulnerable in today's unstable monetary policy climate.

In addition, the ETF displays positive convexity. Convexity is a secondary measure, and this ETF's positive convexity might exacerbate its interest rate risk. Portfolio Summary (iShares) As a counterargument to our skepticism, iShares' Short-Term Corporate Bond ETF contains short-term loans to established companies.

Instead of assessing each loan, I provided a summation of the ETF's constituents' credit ratings. This ETF focuses on short-term debt, which is a means of urgent financing and will be lower down on the "payout waterfall" should a credit event occur. Nonetheless, a holistic overview of the issuers provides a parsimonious indication of their credit safety.

Note: The credit ratings are based on Moody's ratings for long-term unsecured Senior Debt. Asset Credit Rating Bank of America A2 The Boeing Company Baa2 Meta Platforms A1 Dell International Baa2 Citigroup A3 Goldman Sachs Group A2 AbbVie Baa1 Source: Seeking Alpha; YCharts; Moody's Lastly, the ETF provides a reasonable dividend profile. We consider its dividend respectable, and its low monthly value-at-risk (5%) of 0.86% means its price risk likely won't overshadow total return prospects.

Seeking Alpha Seeking Alpha; YCharts Concluding Thoughts We remain coy on corporate bonds as their risk premiums will likely continue to float all over the place amid continuous inflation uncertainty, resilient credit spreads, and ongoing 'country risk'. The iShares Short-Term Corporate Bond ETF's constituents possess sound credit ratings. However, we can't see investor sentiment drifting away from cash and into corporate bonds until risk premiums make intuitive sense.

We assign a Hold rating with a six-month horizon.