Avantis Credit ETF (AVGB)
The Avantis Credit ETF buys corporate bonds — loans that companies issue to borrow money. It holds hundreds of them at once, and it uses a simple rule: favour bonds that pay high interest relative to the actual risk they carry.
What a corporate bond is and why AVGB owns them
When a company needs cash, it borrows by issuing a bond. That bond is a debt — a promise to pay interest and return the principal at a set future date. AVGB owns hundreds of these bonds from different companies.
Some bonds are from stable, profitable companies (investment-grade) — they pay modest interest but are unlikely to default. Others are from weaker companies or troubled operations (high-yield) — they pay much higher interest because default risk is real. AVGB mixes both types. You get some safety from the investment-grade side and higher income from the risky side.
Each bond has a maturity date. Some are due in 18 months, others in 20 years. The longer the maturity, the more the bond’s price moves when interest rates change. AVGB’s portfolio of hundreds of bonds has a blend of short, medium, and long-dated securities.
The rules that guide bond selection
AVGB does not hire a manager to pick individual bonds by hand. Instead, the fund runs available bonds through a mechanical process. The key rule is simple: favour bonds that pay high interest relative to their credit risk.
Think of two bonds. One from Company A is investment-grade and pays 3% interest. Another from Company B is high-yield and pays 7% interest. If the credit markets are pricing them fairly, Company B is the better value — you get paid more for taking more risk. AVGB’s process identifies these situations systematically and overweights the attractively priced bonds.
The fund rebalances regularly. Bonds that have gotten expensive (high price, lower yield) get downweighted. Bonds that have gotten cheap (low price, high yield) get more exposure. This is value investing applied to fixed income — buying what the market is temporarily overlooking.
Trading, costs, and income payments
AVGB trades on NYSE Arca during normal market hours. You can buy or sell throughout the day at the market price. The fund is liquid — there is steady investor demand for credit ETFs — so spreads are tight and execution is straightforward.
The annual expense ratio is roughly 0.25 to 0.35%. A traditional bond mutual fund with a human manager might charge 0.50% or more. A passive, index-tracking bond ETF might charge 0.05%. AVGB sits in the middle — active rules-based selection costs more than a passive index but less than hand-picked active management.
AVGB distributes the interest collected from all those bonds to shareholders monthly. These distributions are taxable as ordinary income if you hold the fund in a taxable account — not the more-favourable capital-gains rate. That tax drag reduces your effective after-tax return if you are in a high tax bracket.
The main risks you face
Interest-rate risk is the largest. When interest rates rise, bond prices fall. If rates jump 2 percentage points, the value of AVGB will drop. You recover that loss if you hold the bonds to maturity (they will pay their full face value), but if you need the cash before then, you lock in a loss. Longer-dated bonds lose more in value when rates rise, so AVGB’s average maturity directly affects your exposure to interest-rate moves.
Credit risk is second. Companies default on their bonds. Investment-grade defaults are rare but not impossible. High-yield defaults are common, especially in recessions. During the 2008 financial crisis, high-yield bonds fell 26%. In the 2020 COVID panic, they dropped 15% before recovering. AVGB holds both investment-grade and high-yield, so you are exposed to credit losses but not concentrated in any single sector or company.
Liquidity risk is third. Corporate bonds do not trade on a public exchange like stocks. They trade between large investors in a decentralized market. In normal times, liquidity is fine. In a financial panic, bid-ask spreads widen, prices become stale, and it becomes hard to sell without significant price concession. AVGB can manage this better than owning individual bonds (the fund manager can sell whichever bonds are most liquid), but the risk remains.
Value-trap risk is the last concern. AVGB’s rules might favour a bond because it pays high interest, but the company paying that high yield might be deteriorating — the yield is high because investors know default risk is rising. Rules cannot distinguish between “cheap and about to recover” and “cheap and about to default.”
Who should and should not own this
AVGB suits investors seeking regular monthly income and willing to accept short-term value swings of 10 to 20%. It is better than savings accounts and short-term bond funds for income, and it is stable enough for a core portfolio holding.
AVGB is wrong for investors who think a recession is coming — credit defaults spike in downturns and the fund will decline sharply. It is wrong for people who need the principal in the next few years — interest-rate moves can create unexpected losses. And it is wrong for anyone who needs complete stability and cannot tolerate volatility.
How to research and evaluate AVGB
Read the fund’s fact sheet. Three numbers matter most: the average credit quality (the fraction of bonds in investment-grade versus high-yield), the average time to maturity (how long until bonds pay back), and the current distribution yield (the income rate you are getting).
Compare AVGB’s rolling three-year and five-year returns to a broad credit index like the Bloomberg Aggregate Credit Index. If AVGB has outperformed after fees, the value approach is working. If it has lagged, a cheaper passive bond ETF might be better.
Watch credit spreads — the additional interest companies pay on bonds compared to Treasury bonds. Wide spreads indicate credit is attractively priced. Tight spreads indicate credit is expensive. That backdrop tells you whether AVGB’s manager has a good hunting ground for undervalued bonds or whether the market is pricing credit fairly.