BlackRock has added to its roster of high-yield exposures with the launch of the iShares BB Rated Corporate Bond ETF (HYBB US).

Joshua Penzner, US Head of Institutional iShares Fixed Income ETFs for BlackRock.

The fund has listed on NYSE Arca and provides targeted access to BB-rated corporate bonds. It comes with an expense ratio of 0.25% and has been seeded with $20 million.

Bonds rated BB are those that occupy the higher echelons of the sub-investment-grade fixed income universe – higher quality ‘junk’ bonds, so to speak.

The fund’s granular focus makes it an industry first. For while there are ETFs targeting the lowermost tier of the investment-grade space and ETFs targeting so-called ‘crossover’ bonds that astride the intersection between investment grade and sub-investment grade, none so far has offered unalloyed exposure to BB-rated bonds.

The fund delivers this exposure by tracking, through physical representative sampling, the ICE Bank of America BB US High Yield Constrained Index, an index calculated by ICE Data Indices.

The index measures the performance of BB, or equivalently rated, fixed rate, US dollar-denominated, corporate bonds. The index is weighted by market capitalization with a 2% cap on any one issuer with a pro rata distribution of any excess weight across the remaining issuers.

The index includes securities issued by US and non-US corporates with maturities of one year or more and that have $250 million or more of outstanding face value. Only securities rated BB+ through BB-, based on an average of Moody’s, Fitch, and S&P, are eligible.

In terms of sector asset allocation, the fund is relatively well-diversified. Issuers in the consumer cyclical sector represent 17.9%, followed by energy (16.6%), communications (14.9%), consumer non-cyclical (8.4%), and capital goods (7.4%). Top names include HCA Healthcare, CCO Holdings, Ford Motor Company, Occidental Petroleum, and Kraft Heinz.

With respect to maturity exposure, the fund has a weighted average maturity of 5.28 years and an effective duration of 4.35 years. Bonds in the 3-5 year maturity bucket contribute the largest share with 26.4% weight, followed by 1-2 years (15.4%), 7-10 years (13.3%), 5-7 years (13.3%), and 2-3 years (12.9%).

Bonds in the BB credit segment now account for some 55% of the total US fixed income high-yield universe, up from 47% at the end of 2019. The growth of the BB universe has largely been the result of bond downgrades from investment grade to high yield.

Joshua Penzner, US Head of Institutional iShares Fixed Income ETFs for BlackRock, said, “The launch of HYBB – the first ETF to capture the BB slice of the market – enables investors to efficiently access over 900 individual bonds in one ticker and is an example of iShares’ continued focus on meeting the evolving needs of our clients.”

The launch comes at a time of record growth for fixed income ETFs generally.

Assets invested in fixed income ETFs are up 30% in the past twelve months ending June, to a record $1.3 trillion. Most of this growth, 84%, has come from inflows, in part owing to the volatility of the first half of 2020 which encouraged investors to capitalize on the continuous price transparency, lower transaction costs, and superior liquidity that ETFs can offer compared to individual bonds.

With this launch, BlackRock now offers a total of 104 fixed income ETFs, with combined assets of $658 billion. Its US high-yield fixed income ETFs offering now stands at 16 with $37.7 billion in AUM. Notable products include the $27.5bn iShares iBoxx $ High Yield Corporate Bond ETF (HYG US) and the $6.2bn iShares Broad USD High Yield Corporate Bond ETF (USHY US).

The issuer predicts that the global fixed income ETF market will reach $2 trillion in AUM by 2024.