BlackRock (NYSE: BLK), the world’s largest asset manager, said its iShares unit, the world’s largest issuer of exchange traded funds, will launch its first smart beta fixed income ETF on Thursday Feb. 26.
The new ETF, the iShares U.S. Fixed Income Balanced Risk ETF (BATS: INC), will be actively managed. The fund seeks to balance interest rate risk and credit risk, the two primary drivers of bond returns. The fund will invest in a diversified portfolio of corporate bonds, U.S. Treasuries, and mortgage-backed securities, with each sector selected based on its historical risk vs. return efficiency. The fund also uses U.S. Treasuries and U.S. Treasury futures contracts to manage the overall interest rate risk of the portfolio. This balanced approach to income generation may help deliver income as well as higher risk adjusted returns relative to that of the traditional market cap weighted bond benchmarks, according to a statement issued by BlackRock.
Though often derided because of moniker critics love to assail, the growth of smart or strategic beta ETFs has been jaw-dropping in recent years. As of late January, there nearly 600 smart beta ETFs listed around the world with over $330 billion in assets. Asset growth for such products stands at double the ETF industry average. [Smart Beta ETFs Continue Gaining Traction]
BlackRock’s iShares is a major player in the equity-based smart ETF space with well-known funds, such as the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV), iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL) and the iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM).
In May 2014, BlackRock said it was mulling the introduction of smart beta fixed income ETFs. Last year, Russell Investments published a survey showing institutional investors plan to ratchet up use of smart beta ETFs.
Of institutional investors surveyed by Russell with more than $100 billion in assets, 88% “have evaluated smart beta or plan to do so in the next 18 months; 77% of respondents with assets between $1 billion and $10 billion, and 50% of those with assets under $1 billion responded similarly,” said Russell. [Smart Beta Usage on the Rise]
“We are excited to launch iShares U.S. Fixed Income Balanced Risk ETF to address investors’ need for income and their concern about rising interest rates. This ETF offers investors a new option for core fixed income portfolios in a low cost, transparent, ETF structure that can be paired with market cap weighted strategies to help increase diversification and potentially increase income,” said Matt Tucker, head of fixed income investment strategy at BlackRock, in the statement.
BlackRock’s foray into strategic beta bond ETFs comes at a time of rapid growth for bond funds. Through Feb. 12, investors poured $19.6 billion into bond ETFs this year, according to iShares, helping place five bond funds on the top 10 list of ETFs for year-to-date inflows. Last year, the Vanguard Total Bond Market ETF (NYSEArca: BND) and the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) were among the top 10 asset-gathering ETFs. [Bond ETFs Keep Gaining Cash]
With AGG and ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), BlackRock’s iShares is one of the largest issuers of fixed income ETFs.
Some smart beta bond ETFs already exist, including the $2.38 billion PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and the $593.3 million PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB).
PCY, which is almost seven years old, tracks the DB Emerging Market USD Liquid Balanced Index. Constituent countries “are selected annually pursuant to a proprietary index methodology,” according to PowerShares.
Tom Lydon’s clients own shares of LQD.