Investment grade bonds remain one of the most widely used tools for bond investments among both retail and institutional investors. In periods of shifting interest rates, persistent inflation, and changing economic conditions, they offer a balance of credit quality, predictable interest payments, and relatively low credit risk compared with high yield bonds or non investment grade debt. These bonds provide regular, predictable interest payments (coupons), offering a reliable cash flow stream for investors. Additionally, investment grade bonds historically have a low correlation with equities, which can help reduce overall volatility and cushion against stock market downturns. Investors looking to invest in diversified fixed-income exposure often choose a fund such as bond funds and ETFs instead of individual bonds, especially when seeking lower liquidity risk and simplified access to other bonds across sectors and geographies.
This article provides an overview of the bond market landscape, explains how credit rating agencies such as Moody’s and Standard & Poor’s classify bonds rated in different ratings tiers, and presents the Top 5 investment grade ETFs available in EUR and USD. Standard & Poor's assigns ratings such as AAA, AA, A, and BBB, which are used to determine whether bonds are considered investment grade or speculative. Investment grade bonds are considered safer than high-yield bonds because they are issued by financially sound entities that are less likely to default. It also covers the main factors influencing price, yield, maturity, and interest rate risk.
Bonds considered investment grade carry ratings from Standard & Poor’s (S&P), Moody’s, and Fitch that indicate a strong ability of the issuer to repay principal and interest income, with an expected strong ability to repay principal and interest income. S&P uses the scale from AAA down to rated BBB, while lower ratings (BB or below) fall into the high yield or junk bonds category, with higher risk and a greater degree of volatility. Investment grade bonds typically have higher liquidity, making them easier to buy or sell compared to other types of bonds.
To be considered investment grade, a bond must generally be rated BBB– or higher by S&P (or Baa3 by Moody’s). Moody’s assigns investment grade status to bonds rated Baa3 or higher, indicating a low risk of default and an expected strong ability of the issuer to meet financial obligations. Such grade bonds are typically issued by companies with stable cash flows, government bonds, supranationals, or large corporation entities with predictable business models. However, if inflation outpaces a bond's yield, the fixed interest payments may lose purchasing power over time, resulting in a negative real return. Callable bonds, which can be redeemed by the issuer before maturity, often when interest rates are falling, can also affect the investor's expected income stream. Investment grade bonds are typically purchased to secure a regular coupon at a reduced risk compared to high yield bonds.
Credit risk refers to the chance the bond issuer may default on its obligations. Investment grade issuers have historically low default rates, while lower rated bonds show greater risk, particularly during recessions or when interest rates rise sharply. In the event of bankruptcy, bondholders are prioritized over shareholders, offering a greater degree of capital protection. Institutional investors often limit their bond investments to only investment-grade bonds due to their historically low default rates.
Credit rating agencies evaluate corporate securities using several criteria, including balance-sheet strength, cash-flow stability, and leverage. Credit ratings also help banks, lenders, and financial institutions assess how likely consumers and businesses are to repay their debts using credit scores. Some bonds are unrated because issuers may choose not to seek a credit rating due to associated costs.
Balance-sheet strength
Cash-flow stability
Industry factors
Leverage and capital structure
Historical ability to pay interest
Investors should regularly monitor credit, because ratings changes—either upgrades or downgrades—can materially affect price, demand, and trading in the secondary market. Investors should also be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to junk status.
When interest rates move, the value of bonds tends to move inversely. As interest rates rise, the market value of existing bonds with lower interest payments tends to fall. Long maturity ETFs typically show greater sensitivity, while short-dated securities carry less interest rate risk. For investors seeking stability, short-duration funds can help mitigate volatility.
ETFs solve several problems that investors face when choosing individual bonds, including:
fragmented market access
inconsistent pricing
limited liquidity
complexity of reviewing many bond issuer profiles and ratings
Bond funds aggregate dozens or hundreds of bonds, providing diversification and reducing liquidity risk compared with narrow other investments.
Advantages of using ETFs for investment grade exposure:
Low-cost instant diversification
Exposure to global issuers
Automatic reinvestment of interest payments
Transparent tracking of an index
Easy trading on regulated exchanges supervised by an exchange commission
Below are five ETFs that represent a clear, diversified approach to the investment strategy of gaining exposure to investment grade bonds, based on size, liquidity, yield, credit quality, and market relevance.
Category: EUR-denominated corporate bond ETF
Index: Markit iBoxx EUR Liquid Corporates
Why it stands out:
This ETF holds more than 1,000 European grade bonds, mostly bonds rated A and BBB. The diversified exposure includes top companies with stable cash flows and strong ratings. The yield reflects the European interest rates environment, typically lower than in USD, but with correspondingly lower volatility.
Risk profile:
Low credit risk, moderate interest rate risk due to longer maturity structure.
Category: USD fixed income ETF
Index: Bloomberg Global Aggregate Corporate – USD
Why it stands out:
Offers wide exposure to U.S. and global issuers with a mix of A and rated BBB names. It benefits from deep USD secondary market liquidity and strong demand from global investors. The ETF provides attractive yield relative to EUR options.
Risk profile:
Moderate credit exposure, higher price volatility if U.S. interest rates rise.
Category: EUR sovereign securities
Index: Eurozone AAA/AA government bonds
Why it stands out:
Diversified across major European sovereigns. These government bonds are typically the highest in credit quality, with extremely low default probability. Suitable for risk-averse investors seeking stability, capital preservation, and steady interest income.
Risk profile:
Minimal credit risk, but potentially higher interest rate risk due to long-duration holdings.
Category: U.S. Treasury short-duration
Why it stands out:
Provides very low credit risk (U.S. Treasury is considered one of the safest issuer types globally) while offering exposure to shorter maturity instruments that reduce sensitivity to interest rates. One of the most liquid bond funds globally.
Risk profile:
Minimal default risk, minimal duration risk.
Although this article focuses on investment grade, many investors compare investment-grade options with high yield exposure to understand the trade-off between yield and risk. This ETF holds non investment grade and junk bonds across Europe.
Why it stands out:
Significantly higher yield than investment grade ETFs, but with substantially higher risk, greater risk of default, and more volatile price behaviour. It is included for additional information as a benchmark rather than a core recommendation.
Investment grade bonds offer lower yield but superior credit quality.
High yield bonds provide higher yield, but the issuer has lower ratings, meaning more uncertain ability to repay debt.
Example:
A rated BBB corporate bond might pay 3–5% depending on region and economic conditions, while a BB-rated bond could pay 6–9% but carries elevated credit and liquidity risk.
Long-term maturity IG bonds show more interest rate risk.
HY bonds are less sensitive to rates (spread dominates), but more sensitive to recession risk.
Investment grade default rates typically remain well below 1%.
High yield default rates historically range between 2–5% in normal cycles and higher in downturns.
When reviewing bond funds and ETFs, key elements include:
Verify the ratings from Moody’s, Standard & Poor’s (S&P), and Fitch. Standard & Poor's assigns credit ratings that help distinguish between investment-grade and non-investment-grade bonds.
Ensure securities are genuinely considered investment grade.
Higher yield often compensates for longer maturity or lower credit rating.
If interest rates rise, ETF price can fall.
Short-duration = lower volatility
Long-duration = higher sensitivity
Ensure exposure to a wide range of companies, regions, and securities.
Broader diversification reduces risk.
ETFs with higher trading volume in the secondary market reduce liquidity risk.
Your choice depends on:
Risk tolerance
Need for interest income
Currency preference (EUR vs USD)
Time horizon
Preference for sovereign, corporate bond, or mixed exposure
Conservative investors often prefer short-duration government ETFs.
Those seeking higher returns may use diversified USD investment grade ETFs that provide stronger yield.
Navigating the universe of investment grade bonds can be challenging. Investors must review credit risk, ratings, maturity profiles, sensitivity to interest rates, and differences between higher-quality and higher-risk issuers. For individuals, this often means going through large amounts of data on separate bonds and continuously comparing yields, structures, and issuer profiles.
Bondfish helps simplify this early stage of the process. The platform focuses on individual bonds, displaying key parameters such as coupon, yield, maturity, and a basic credit-risk indication, along with short analytical notes to provide context. It is not a substitute for full research or ETFs, but it offers a clear and accessible starting point for investors who want to approach bond selection in a more informed way.
Ready to see how it works?
Start exploring Bondfish today.