Just hours before the U.S. election got underway, investors pulled the most cash ever from the world’s largest exchange-traded fund tracking corporate bonds.

As market volatility awakens and the pandemic hits America Inc.’s creditworthiness, more than $1.4 billion exited the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) on Monday, according to data compiled by Bloomberg. Trading activity included a single transaction worth about $250 million, though it’s unclear if that constituted selling or buying.

All in, the redemption dwarfs the previous record of $1.1 billion in late February when the coronavirus sparked widespread turmoil. Yet even without the election, LQD has been quietly getting more risky as rating downgrades and a boom in issuance take the number of BBB rated securities in the $54.7 billion fund toward a record.

Out of 2,321 holdings, the ETF had 1,150 bonds rated BBB at the end of October, data show. The hefty contingent underscores the need for investors to look under the hood of funds they choose, according to Bloomberg Intelligence’s James Seyffart. Rising infection rates and new lockdowns could spell trouble for at least some of these bonds.

“Triple B minus bonds run the risk of being downgraded to high yield and being sold off,” said Seyffart, an ETF analyst. “In an era where we’re looking at more lockdowns and further economic damage, that’s definitely a risk.”

Exposed To Virus
There have been more than twice as many downgrades to American companies this year than in 2019 thanks to the pandemic and the economic damage it has inflicted. That has fanned fears about a potential deluge of so-called fallen angels — companies that have lost their investment-grade status.

At the same time, lower-rated companies have been loading up on inexpensive debt after rates were slashed to combat the economic fallout of the pandemic.

Almost 5% of LQD is weighted to oil and gas companies, 3.5% to retail business, and 3.4% to pipelines. Those are among the sectors that could be hit hardest amid measures to combat a second wave of the virus, according to Wells Fargo Investment’s Sameer Samana.

“We would caution folks on the leisure/travel areas, along with energy and weaker industrials/real estate companies,” said Samana, the firm’s senior global market strategist. “Those worries are not discounted in markets, not fully. Stimulus and the Fed have kept credit markets eternally hopeful and we’re finally starting to see some cracks in that narrative.”

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