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ETF Specialist

This Core Bond ETF Looks Outside the U.S.

IShares U.S. Credit Bond differentiates itself from peers by including foreign issues.

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 IShares U.S. Credit Bond ETF (CRED) offers market-cap-weighted exposure to U.S.-dollar-denominated, investment-grade corporate and foreign government debt. The inclusion of foreign bonds adds a layer of diversification, but these securities tend to have lower yields than most U.S. corporate bonds, which could slightly reduce the fund's return potential. This strategy has a cost advantage over most of its actively managed peers, but there are some cheaper index alternatives, so it earns a Morningstar Analyst Rating of Bronze.

Unlike its peers in the corporate-bond Morningstar Category that focus on domestic corporate debt, the fund's portfolio includes noncorporate issues such as supranational and sovereign bonds. These bonds improve the portfolio's diversification, but tend to offer lower yields than their corporate counterparts with similar credit ratings and terms. The fund allocates roughly 15% of its capital to noncorporate securities, while most of its category peers do not invest in them at all. The remaining 85% of the portfolio is predominantly invested in A- and BBB rated bonds. Market-cap weighting pulls the fund toward the largest debt issuers and allows the composition of the portfolio to change with debt issuance. However, it also reduces turnover and implementation costs, since it tilts the fund toward the most-liquid issues.

Phillip Yoo does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.