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 The fund, which is set to launch on Thursday, arrives at a time when
the market for smart beta funds, or those that use factors other
than market capitalization to weight their holdings, has been
rapidly expanding in the equity space but is still in nascent stages
for the fixed-income market.
"You've seen this trend on the equity side, and I think you're
seeing it start to accelerate on the fixed-income side," said Matt
Tucker, head of iShares fixed-income strategy at BlackRock. "We
definitely plan to expand this area and offer other options to
investors."
BlackRock first told Reuters it was experimenting with smart beta
bond strategies last May.
Traditional bond index funds are dominated by issuers with the most
outstanding debt and can be concentrated in certain segments of the
bond market that carry more risk. Smart beta funds seek to reduce
this risk by giving more weight to alternative factors such as
corporate cash flow or economic growth rates of countries, or as in
the case of the new BlackRock fund, credit and interest rate risk.
The idea behind the new fund, which will be called the iShares Fixed
Income Balanced Risk ETF, is to weight its holdings so that the
fund's overall credit risk and interest rate risk are equally
balanced 50/50.
"For U.S.-based investors, rate risk and credit risk are the primary
drivers of returns," Tucker said. Interest rate risk has been in
focus for investors expecting the Federal Reserve to raise rates
later this year.
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In the benchmark Barclays Aggregate bond index, which is commonly
tracked by traditional broad bond ETFs, interest rate risk is
concentrated around 90 percent.
BlackRock's new smart beta fund will include mortgages,
investment-grade corporate bonds with maturities between 1-5 years
and 5-10 years and high-yield bonds rated BB and below. It will also
use U.S. Treasury futures to adjust the fund's interest rate risk up
or down to match its credit risk profile.
(Reporting by Ashley Lau in New York; Editing by Dan Grebler)
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