The New Safe Haven During Stock Market Sell-Offs

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Corporate bond ETFs have proved they're a safe haven in the latest stock market sell-off.

While theSPDR S&P 500 ETF ( SPY ) has fallen 7% from its multiyear high, corporate bonds are still trading near their highs.IShares IBoxx $ Invest Grade Corporate Bond Fund ( LQD ) and other corporate bond ETFs kept rising while the stock market started falling in mid-September.

"Corporate credit prices holding up well would indicate a faith in the balance sheet health of corporate credit," said Scott Colyer, CEO of Advisors Asset Management, based in Monument, Colo., with $7.3 billion in assets under management.

In addition to holding their values, they're also rewarding investors more for sitting tight. LQD yields 3.84% vs. 1.57% for benchmark 10-year Treasury bonds and 2.02% for the SPY.

"Corporate Bond ETFs are a great way to spread out risk and earn good yield even with volatility in the markets," said Ronald Lang, principal at Atlas Wealth Management in Philadelphia, Pa., with $20 million in assets under management.

The major risk of investing in bonds is rising interest rates, which move opposite of prices. When interest rates rise, bond prices fall. The longer bonds have until maturity, the more their prices will fall if rates rise.

Because of this, Lang recommendsVanguard Short-Term Bond ETF ( BSV ), which yields 1.65%, andVanguard Short-Term Corporate Bond ETF ( VCSH ), which yields 2.02%.

"Interest rates are low and can only go in one direction, up, which will bring down the price of bonds," Lang said. "The short-term bonds won't fluctuate as much with volatility in the market and interest rate changes."

He also recommendsMarket Vectors International High Yield Bond ETF ( IHY ) andGuggenheim BulletShares 2015 High Yield Corporate Bond (BSJF), which holds a batch of bonds that mature that year. IHY, which started trading in September, has no indicated yield. BSJF yields 5.18%.

Investment-grade corporate bond ETFs are widely viewed as low-risk investments as they hold debts issued by stable companies with good credit.

"These companies generally incur lower risk profiles and have more consistent cash flows that can help them weather the impact of macroeconomic factors such as the potential slowdown from the failure to resolve the fiscal cliff," said Todd Rosenbluth, ETF analyst with S&P Capital IQ in New York.

Fund Flows

Investors have been dumping stock funds en masse and piling into bond funds on fears of the U.S. fiscal cliff, anti-austerity protests in Europe and the 17-country eurozone falling into a double-dip recession.

U.S. investment-grade bond funds absorbed $2 billion in the week ended Nov. 14, according to EPFR Global. Meanwhile, investors pulled $7 billion out of U.S. equity funds and more than $1 billion from high-yield bond funds -- the most since early June.

"EPFR Global-tracked bond funds took in $5.29 billion during the week ended Nov. 14, while net redemptions from stock funds hit their highest level since the week preceding the U.S. Federal Reserve's announcement of QE3," EPFR wrote in a note.

Corporate Bond ETFs And Yields

1.Vanguard Short Term Corporate Bond ETF ( VCSH ) 2.02%

2.Vanguard Intermediate Term Corporate Bond ETF (VCIT) 3.03%

3.Vanguard Long Term Corporate Bond ETF (VCLT) 3.88%

4.iShares Barclays Credit Bond Fund ETF (CFT) 3.48%

5.iShares IBoxx $ Invest Grade Corporate Bond Fund ( LQD ) 3.84%

6.iShares iBoxx $ High Yield Corporate BondETF (HYG) 6.78%

7.SPDR Barclays Capital High Yield Bond ETF (JNK) 6.89%

8.Market Vectors International High Yield Bond ETF ( IHY ) n/a

9.Guggenheim BulletShares 2015 High Yield Corporate Bond (BSJF) 5.18%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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