Should you invest in fixed income when corporations are all too eagerly selling new bonds in staggeringly large amounts? Likely not. This year, U.S. companies like Microsoft , AT & T , Amgen and Oracle each sold billions of dollars worth of debt to take advantage of low interest rates. One of the few economies with even lower interest rates than the U.S. is Europe so Blackstone , 3M and United Technologies all sold billions in euro-dominated debt recently. But these corporations don't need the cash and don't even have a specific use in mind. They are just taking advantage of what they see as extremely high prices for bonds. Why should investors accommodate them by adding those bonds or corporate bond exchange-traded funds to their portfolio? They shouldn't. The iShares iBoxx Investment Grade Corporate Bond ETF had inflows of $588 million last week, making it the fourth-most popular ETF and the most popular fixed income ETF, according to ETF.com. Investors clearly decided to take money out of government bonds and put it in corporates as the iShares 20+ Year Treasury Bond ETF had the largest net outflows of any fund last week at $501.6 million. The corporate bond ETF, ticker "LQD," is made up of 1,384 U.S. investment-grade corporate bonds. The weighted average maturity is more than 12 years so it would be fair to call LQD a long-term corporate bond fund. The banking sector is easily the largest in LQD with JPMorgan , Goldman Sachs , Bank of America , Morgan Stanley , Wells Fargo , Citigroup and General Electric Capital among the top 10 issuers. That mix generates a greater yield than U.S. Treasurys but should come at the cost of greater risk. And risk is just what bond owners have experienced in May as the yield on 10-year Treasury notes climbed from 2.05 percent to as high as 2.28 percent. In Europe, the move was even greater with the yield on German 10-year notes nearly doubling as it climbed from 0.37 percent to as high as 0.72 percent. Since yields and prices move inversely, prices for these notes have fallen. Read More Market's 'ascending triangle' signals breakout But the potential for rising interest rates to hurt LQD investors doesn't stop with the possible price action. LQD, despite what its ticker promoting liquidity promises, is made up of more than 1,300 bonds of varying levels of quality and market depth. As Blackrock itself points out, bond liquidity—measured by both trading volumes and average trade size—has seen limited growth since 2007 despite record bond issuance and inflows to bond ETFs. Bonds themselves are less liquid than stocks because while a company is likely to have a single class of stock trading, it might have dozens of unique bonds trading, each of which has its own maturity, coupon payment and call terms. That fragmentation hurts liquidity. And since the Volker rule makes it more difficult for banks to put their own capital to work in order to facilitate a bond trade for a customer, the market maker community has shrunk as bond ETF assets have grown. Bonds should be a portion of any well-diversified portfolio, but as every equity investor knows already, when the market is under extreme pressure it's not always possible to hit the "sell" button and get the trade executed. Now corporate bond investors, especially ones that invest through ETFs, should prepare to learn the same lesson. Scott Nations is president and chief investment officer of NationsShares as well as a CNBC contributor. You can follow Scott on Twitter @ScottNations Disclosure: None
