As the alternatively-weighted, or smart beta, exchange traded funds phenomenon continues to gain momentum, one of the questions that is being asked is when are more fixed income funds going to adopt smart beta strategies?
There are a few smart bond ETFs currently on the market and that number is expected to continue increasing. One of the newer though still compelling options is the iShares U.S. Fixed Income Balanced Risk ETF (BATS: INC). Actively managed, the iShares U.S. Fixed Income Balanced Risk ETF came to market in February.
INC invests 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.
The new ETF is off to a solid start having amassed nearly $74 million in assets under management since coming to market. More importantly, in what is becoming an increasingly tricky environment to navigate for fixed income investors and fund managers, INC is outperforming some of its larger rivals. In recent months, the iShares offerings has been noticeably less bad, or better than, among others, the Vanguard Total Bond Market ETF (NYSEArca: BND) and the PIMCO Total Return ETF (NYSEArca: BOND). [A Smart Beta Bond ETF]
INC seeks to balance interest rate risk and credit risk, the two primary drivers of bond returns. The new ETF allocates nearly 36% of its weight to mortgage-backed securities and nearly 47% of the fund’s holdings have maturities ranging from three to five years. INC has scant exposure to bonds with maturities of longer than 10 years as maturities of 10 to 15 years and 15 to 20 years combine for just 4.7% of the ETF’s weight.
INC’s weighted average maturity is 6.61 years with a duration of just 3.9 years, a positive trait at a time when investors are looking for lower duration fixed income ideas.
INC’s heavy exposure to government bonds ensures credit quality is not an issue for the fund as almost 39% of its holdings carry AAA ratings. A and AA-rated issues combine for 38% of INC’s weight, according to issuer data.
INC charges just 0.25% per year, which is lower among both actively managed and smart beta ETFs.
iShares U.S. Fixed Income Balanced Risk ETF