iShares, the world’s largest family of Exchange Traded Funds (ETFs) from BlackRock, continues to hit the bond market with the launch of new products that look to give investors new options for fixed income exposure. In the latest offering, iShares added seven new bond ETFs targeting various subsectors of the bond world.
These new products included: Utilities Sector Bond Fund (AMPS), Industrials Sector Bond Fund (ENGN), Financials Sector Bond Fund (MONY), Barclays U.S. Treasury Bond Fund (GOVT), Barclays GNMA Bond Fund (GNMA), Barclays CMBS Bond Fund (CMBS) and Aaa-A Rated Corporate Bond Fund (QLTA). With these additions, iShares holds the exposure of 44 fixed income bond ETF. (iShares Debuts Seven Targeted Bond ETFs)
In this uncertain macroeconomic scenario where investors get a very low yield, many look for a fixed income ETFs that could potentially offer higher levels of current income. As a result, new products which look to boost yields without adding too much on in risks have been very popular.
In fact, according to BlackRock Investment Institute's ETP Landscape, global flows into fixed income ETFs reached record levels in January with the products attracting $9 billion in new net assets. (Three Bond ETFs For A Fixed Income Bear Market).
iShares Sovereign Screened Global Bond Fund
Thanks to this, iShares looks to continue its push for bond assets, revealing plans in a recent SEC filing for the launch of the ‘iShares Sovereign Screened Global Bond Fund’. This fund looks to target global sovereign bonds and minimize risk, tracking bonds that are both in local currencies and the U.S. dollar.
The fund, which looks to be actively managed, is expected to have a higher portfolio turnover compared to those which replicate the performance of an index, potentially pushing up total costs. Despite higher portfolio turnover, the fund will not have its assets invested in swap agreements, futures contracts or option contracts. However, currency forwards for hedging or trade settlement purposes, cash and cash equivalents, including money market funds advised by BFA or its affiliates may be the exceptions.
The filing states that the iShares Sovereign Screened Global Bond Fund is set to include those sovereign bond fund of the countries that falls in the BlackRock Sovereign Risk Index. This benchmark has been designed to evaluate the credit risk of a country and assigning them a score based on certain fiscal, financial and institutional metrics (read Follow Buffett With These Developed Market Bond ETFs).
The fund seeks to builds its investment portfolio based on such scores, thereby cutting down on the weights to countries which have weaker fundamentals. This looks to be unique among many other bond funds currently on the market and it could help to steer investors towards higher quality securities.
Risk of Bond ETFs
Investing in global sovereign bond has its advantages and disadvantages. It is subject to credit risk, emerging market risk, management risk, just to name a few. However, it also gives the opportunity for the U.S investor boost yields in the current weak interest rate market environment. Yet with that being said, it should also be noted that the screening technique could result in lower payouts than some other funds in the space, a factor investors should definitely keep in mind.
Bond ETF Competition
The fund shares competition with Advisor Madrona Global Bond ETF (FWDB). This fund attain its investment objective by exceeding and price and yield performance of its benchmark index, the Barclays Capital Aggregate Bond Index. The fund seeks to accomplish this by picking a diversified portfolio of fixed income exchange-traded products (ETPs) across a variety of market segments.
FWDB invests its assets in 12 distinct global bond classes that stretch across the entire global investable bond universe. FWDB’s portfolio has been constructed on the basis of weighting the bonds based on their historic yield curve analysis and a mean reversion strategy. The fund has an AUM of $16.7 million.
Another ETF which falls in the segment is iShares S&P Citigroup International Treasury Bond Fund (IGOV). The ETF replicates the performance of S&P/Citigroup International Treasury Bond Index Ex-US. The fund seeks to invest at least 80% of its assets in the securities that are in the index and also in investments that offer considerably same exposure to the securities in the principal index. The fund has its investments in countries bonds like Japan, Germany, Netherlands, Belgium, etc.
IGOV has been pretty popular since its inception, amassing close to $300 million in assets. This is in stark contrast to FWDB which has struggled despite its solid methodology and diversified approach. Thanks to this divergence and the proposed iShares fund’s role in between these two, it is difficult to say whether the assets will come for the proposed fund.
However, if the market remains shaky and investors continue to search for current income beyond America’s shores, this ETF, if ever approved by the SEC, could be an intriguing choice for some globally-focused investors.