iShares unveils ETFs to mitigate interest rate risk

Oct 18th, 2013 | By | Category: Fixed Income

iShares, the exchange-traded funds platform of BlackRock, has listed three passively managed ultrashort bond ETFs and two short-duration bond ETFs on the London Stock Exchange.

iShares unveils ETFs to mitigate interest rate risk

iShares has launched a suite of ultrashort and short-duration bond ETFs on the London Stock Exchange. The funds are designed to help investors mitigate interest rate risk.

The ultrashort bond ETFs are the first of their kind in Europe.

The new funds come in response to investor demand for products that can help mitigate the risk posed by potential rising developed market interest rates, as well as for exposures that can provide better returns than cash.

The iShares Euro Ultrashort Bond UCITS ETF (ERNE), iShares $ Ultrashort Bond UCITS ETF (ERND) and iShares £ Ultrashort Bond UCITS ETF (ERNS) are based on the recently launched Markit iBoxx Liquid Ultrashort Indices.

They invest primarily in fixed and floating-rate investment grade corporate bonds denominated in euros, US dollars and sterling respectively, with the fixed-rate bonds maturing between zero and one year and floating-rate bonds between zero and three years.

The iShares $ Short Duration Corporate Bond UCITS ETF (SDIG) and iShares $ Short Duration High Yield Corporate Bond UCITS ETF (SDHY) invest in investment grade and sub-investment grade US dollar-denominated corporate bonds respectively. To be included in the funds, the bonds must be five years or fewer from maturity, resulting in a typical fund duration of between two and three years.

All five ETFs are physically replicating optimised funds, purchasing and holding the underlying bonds. The total expense ratio for the ultrashort bond ETFs is 0.2% and ranges between 0.2% and 0.45% for the short duration products.

Tom Fekete, Head of Product Development for iShares in EMEA, commented: “Today’s market conditions have created significant demand for short and ultrashort duration strategies. Developed economies are on the long path of slow and steady growth, and it is widely anticipated that the low interest rates of recent years will eventually start to climb.

“Long-dated bonds are particularly impacted by rising interest rates, and fixed income investors are de-risking by shifting their emphasis towards shorter duration bonds that are less exposed to changes in these rates. At the same time, investors who have been on the sidelines of the market are looking for ways to increase their returns, and short duration bonds can offer greater yield than some cash investments for those looking to put their cash to work.

“Short and ultrashort duration bond ETFs provide instant and diversified exposure to bonds that are closer to maturity in a single, transparent and cost-efficient trade. These new funds, combined with our existing interest rate hedged ETFs, give investors a variety of new options to invest in fixed income as we enter a new stage in the global economic recovery.”

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