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While examining different corporate bond ETFs, I noticed that many bond funds seem substantially exposed to the finance sector. I see percentages of up to 60% of all positions in financial businesses.

I'm trying to grasp whether such funds make sense. It might simply be that the financial sector is so huge that these exposures are warranted. My knowledge of the financial sector is simply not extensive enough.

But if our purpose is to lend money to companies so that they can produce services or goods, why would we lend to a financial sector that in turn would just lend (in one form or another) also to other companies? Or, if the financial sector instead of lending invests with the money we borrowed them, will this not provide a correlation between these bond funds to stocks in general? Would the latter not be undesirable when the goal is diversification into different asset classes?

TL;DR: Does substantial exposure to the financial sector make sense in our bond funds?

  • It is all about the risk ;) – Ross Oct 28 '15 at 12:59
  • also what ETFs did you look at? That way we can do some research on their portfolios/holdings. – Ross Oct 28 '15 at 13:08
  • @Ross For example, I was looking into Vanguard Short Term Corporate Bond ETF (VCSH, 40% finance) , and iShares Euro Corporate Bond 1-5yr UCITS ETF (SE15, 40% finance). The latter actually is available in a version without exposure to financials, namely iShares Euro Corporate Bond ex-Financials 1-5yr UCITS ETF (EEX5, 0% finance). – Stemic Oct 28 '15 at 13:44
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One reason a lot of bond ETFs like Financials are because of how financial companies work. They usually have amazing cash flows due to deposits and fees and therefore have little risk associated with paying their debts in the short term.

The rest of VCSH contains companies with low default risk and good cash flow generation as well:

  • GE
  • Verizon
  • Apple
  • Abbive

This is of course the objective of VCSH:

  • Seeks to provide current income with modest price fluctuation.
  • Invests primarily in high-quality (investment-grade) corporate bonds.
  • Maintains a dollar-weighted average maturity of 1 to 3 years

Banks themselves issue a lot of bonds to raise cash to lend for other purposes. Banks are intermediary and help make funds liquid for investors and spenders.

Hope that helped answer your question. If not comment below and I'll try to adjust the answer to be more complete.

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