LQD vs. TIP: What’s The Difference?

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares TIPS Bond ETF (TIP) are both among the Top 100 ETFs. LQD is a iShares Corporate Bond fund and TIP is a iShares Inflation-Protected Bond fund. So, what’s the difference between LQD and TIP? And which fund is better?

The expense ratio of LQD is 0.05 percentage points lower than TIP’s (0.14% vs. 0.19%). LQD is mostly comprised of BBB bonds and TIP has a high exposure to AAA bond. Overall, LQD has provided higher returns than TIP over the past ten years.

In this article, we’ll compare LQD vs. TIP. We’ll look at portfolio growth and annual returns, as well as at their industry exposure and fund composition. Moreover, I’ll also discuss LQD’s and TIP’s risk metrics, holdings, and performance and examine how these affect their overall returns.

Summary

LQD TIP
Name iShares iBoxx $ Investment Grade Corporate Bond ETF iShares TIPS Bond ETF
Category Corporate Bond Inflation-Protected Bond
Issuer iShares iShares
AUM 40.23B 28.3B
Avg. Return 6.58% 4.07%
Div. Yield 2.48% 1.87%
Expense Ratio 0.14% 0.19%

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a Corporate Bond fund that is issued by iShares. It currently has 40.23B total assets under management and has yielded an average annual return of 6.58% over the past 10 years. The fund has a dividend yield of 2.48% with an expense ratio of 0.14%.

The iShares TIPS Bond ETF (TIP) is a Inflation-Protected Bond fund that is issued by iShares. It currently has 28.3B total assets under management and has yielded an average annual return of 4.07% over the past 10 years. The fund has a dividend yield of 1.87% with an expense ratio of 0.19%.

LQD’s dividend yield is 0.61% higher than that of TIP (2.48% vs. 1.87%). Also, LQD yielded on average 2.51% more per year over the past decade (6.58% vs. 4.07%). The expense ratio of LQD is 0.05 percentage points lower than TIP’s (0.14% vs. 0.19%).

Fund Composition

Holdings

LQD - Holdings

LQD Bond Sectors Weight
BBB 50.92%
A 37.97%
AA 8.49%
AAA 2.7%
BB 0.05%
Below B 0.0%
B 0.0%
US Government 0.0%
Others -0.13%

LQD’s Top Bond Sectors are ratings of BBB, A, AA, AAA, and BB at 50.92%, 37.97%, 8.49%, 2.7%, and 0.05%. The fund is less weighted towards Below B (0.0%), B (0.0%), and US Government (0.0%) rated bonds.

TIP - Holdings

TIP Bond Sectors Weight
AAA 99.31%
Others 0.69%
Below B 0.0%
B 0.0%
BB 0.0%
BBB 0.0%
A 0.0%
AA 0.0%
US Government 0.0%

TIP’s Top Bond Sectors are ratings of AAA, Others, Below B, B, and BB at 99.31%, 0.69%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards BBB (0.0%), A (0.0%), and AA (0.0%) rated bonds.

Risk Analysis

LQD TIP
Mean Return 0.47 0.28
R-squared 66.93 66.57
Std. Deviation 5.94 4.33
Alpha 0.52 -0.58
Beta 1.62 1.18
Sharpe Ratio 0.85 0.62
Treynor Ratio 3.08 2.24

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has a Sharpe Ratio of 0.85 with a Alpha of 0.52 and a R-squared of 66.93. Its Treynor Ratio is 3.08 while LQD’s Beta is 1.62. Furthermore, the fund has a Mean Return of 0.47 and a Standard Deviation of 5.94.

The iShares TIPS Bond ETF (TIP) has a Sharpe Ratio of 0.62 with a R-squared of 66.57 and a Beta of 1.18. Its Alpha is -0.58 while TIP’s Standard Deviation is 4.33. Furthermore, the fund has a Mean Return of 0.28 and a Treynor Ratio of 2.24.

LQD’s Mean Return is 0.19 points higher than that of TIP and its R-squared is 0.36 points higher. With a Standard Deviation of 5.94, LQD is slightly more volatile than TIP. The Alpha and Beta of LQD are 1.10 points higher and 0.44 points higher than TIP’s Alpha and Beta.

Performance

Annual Returns

LQD vs. TIP - Annual Returns

Year LQD TIP
2020 11.14% 10.91%
2019 17.13% 8.28%
2018 -3.76% -1.43%
2017 7.16% 2.92%
2016 5.97% 4.56%
2015 -1.08% -1.59%
2014 8.57% 3.49%
2013 -2.49% -8.65%
2012 11.68% 6.8%
2011 8.89% 13.4%
2010 9.15% 6.1%

LQD had its best year in 2019 with an annual return of 17.13%. LQD’s worst year over the past decade yielded -3.76% and occurred in 2018. In most years the iShares iBoxx $ Investment Grade Corporate Bond ETF provided moderate returns such as in 2017, 2014, and 2011 where annual returns amounted to 7.16%, 8.57%, and 8.89% respectively.

The year 2011 was the strongest year for TIP, returning 13.4% on an annual basis. The poorest year for TIP in the last ten years was 2013, with a yield of -8.65%. Most years the iShares TIPS Bond ETF has given investors modest returns, such as in 2014, 2016, and 2010, when gains were 3.49%, 4.56%, and 6.1% respectively.

Portfolio Growth

LQD vs. TIP - Portfolio Growth

Fund Initial Balance Final Balance CAGR
LQD $10,000 $19,776 6.58%
TIP $10,000 $15,229 4.07%

A $10,000 investment in LQD would have resulted in a final balance of $19,776. This is a profit of $9,776 over 11 years and amounts to a compound annual growth rate (CAGR) of 6.58%.

With a $10,000 investment in TIP, the end total would have been $15,229. This equates to a $5,229 profit over 11 years and a compound annual growth rate (CAGR) of 4.07%.

LQD’s CAGR is 2.51 percentage points higher than that of TIP and as a result, would have yielded $4,547 more on a $10,000 investment. Thus, LQD outperformed TIP by 2.51% annually.


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