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BlackRock Launches iShares Core Bond ETF

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What You Need to Know

  • BlackRock is the latest among a growing number of asset managers to bring to market a core bond fund this year.
  • The iShares USD Bond Factor ETF uses a rules-based strategy to to choose assets and allocations.
  • The ETF invests in investment-grade, high-yield, mortgage-backed and Treasury securities.

The proliferation of core bond funds this year, some indexed, some actively managed, continues, with the launch of BlackRock’s iShares USD Bond Factor ETF (USBF).

The core bond fund strives to outperform the broader fixed income market using a rules-based index strategy that allocates assets based on multiple factors.

First, there are the macro signals from the high-yield market about risk, then the macro factors of credit, real rates and finally the relative value and quality of the bonds.

The ETF invests in U.S.-based high-yield, investment-grade corporate and mortgage-backed bonds as well as U.S. Treasurys. It has an effective duration — a measure of sensitivity to interest rate changes — of 6.23 years, a weighted average maturity for its holdings of 7.24 years and a net expense ratio of 0.18%, which it says is lower than 86% of mutual funds and ETFs in the Morningstar Core Bond category.

Karen Schenone, Head of iShares US Fixed Income Strategy within BlackRock’s Global Fixed Income Group, said in a statement that the fund’s ability to adjust its holdings based on various risk-on and risk-off macroeconomic environments offers “opportunity to place a dynamic bond allocation at the core” of investors’ portfolios.

Andrew Ang, Head of Factor Investing Strategies at BlackRock, explained that the combination of macro and style (value and quality) “can provide distinct and complementary sources of returns.” The value factor is used to identify underpriced securities; the quality factor to reveal corporate bonds with lower probabilities of default, said Ang. “We believe this can be a possible winning alternative to broad-based debt market exposures.”

Other Asset Managers Launching Bond Funds This Year

BlackRock’s core bond ETF launch comes the same week that Vanguard started taking orders for a new core bond mutual fund, the Vanguard Core-Plus Bond Fund, which starts trading Oct. 25. The new fund will have more flexibility to invest in high-yield and emerging market bonds than Vanguard’s long-standing Core Bond Fund.

The Vanguard fund is actively managed, as are three core bond ETFs that T. Rowe Price launched earlier this month — its first actively managed fixed income ETFs — which are managed by the same team as similar mutual funds.

Other asset managers that launched bond ETFs this year include State Street, in partnership with Loomis Sayles, Harbor Capital Advisors, Columbia Threadneedle and FlexShares.